How much tax do you pay on dividends?

If you’ve recently launched your own sole trader or limited organisation, first of all – congrats! Secondly, you may have heard certain financial buzzwords like ‘dividends tax’ floating about and may be wondering what the deal is.

A dividend is a chunk of your income that is awarded to shareholders once your company begins earning a profit – and like most things financial, there are tax implications. But don’t panic! Our easy-to-digest expert guide will provide everything you need to know about dividend tax in the UK.

What is a Dividend?

A dividend is a financial sum that is paid by a company – out of its profits – to its shareholders on a periodic basis, which is often annually or quarterly. The amount paid is typically decided by the head of the company, based on income data, and is usually a percentage of an organisation’s share price.

Who Can Receive Dividend Payments?

As mentioned above, dividends predominantly go to the business’s shareholders, but they can also go to directors or be reinvested back into the business. In short, dividends are dished out to anyone who has a share in the business that holds dividends rights (which is most shareholders).

How much tax will I pay on my dividends?

Dividend payments fall into certain tax brackets, the rates of which usually change at the beginning of a new tax year. For example, the dividend tax rates for the 2023/24 year are:

Percentage

Profit/Rate

8.75%

Between £12,570 and £50,270

33.75%

Between £50,270 and £125,140

39.35%

£125,140 and higher

 

What tax-free allowances can I use against dividends?

When it comes to tax-free allowances, you can use up to £12,570 of the personal allowance and up to £500 (as of the 6 April 2024 to 5 April 2025 tax year) of the dividend allowance without needing to pay tax on either.

According to HMRC, you are not expected to pay dividends tax on your Personal Allowance maximum income (£12,570). Nor do you need to pay dividends tax from shares in an ISA account.

How to Work Out Dividends Tax

As of April 2024, the dividends allowance was axed from £1000 to £500, which has changed the trajectory of dividends tax. How much tax you pay depends on your income bracket (which is referenced in the table above).

To understand your dividends tax band, you need to calculate your total dividend income to your other profits. Because of these two different areas, you may end up paying tax at more than one rate.

Finally, while you may be expected to pay dividends tax, you won’t need to pay National Insurance Contributions (NICs) on your dividends.

When and How Do I Pay Myself Dividends?

It is entirely up to you when you decide to distribute dividends funds. As we mentioned earlier, many organisations do so periodically; often quarterly or annually. 

However, you are only able to do so once there are enough profits to allow it and if they are covered by the company profits net of corporation tax (CT).

When and How Do I Pay Dividend Tax?

As with most tax situations, you will be required to pay yours before the end of the current tax year/the beginning of the new tax year, which usually falls around the 6th of April. 

Before you pay it, you will need to have a share portfolio and have earned over £2,000. Most organisations will pay their dividends tax when completing their self-assessment tax return.

Should I Pay Myself in Dividends or Bonuses?

Many business owners struggle to decide which is the best self-payment option – a bonus or dividends payment – and both have their advantages and disadvantages. 

However, it is important to choose the best one to preserve the financial well-being and longevity of your company; factors of which can be discerned after weighing out the pros and cons of each, as well as examining your cash flow data.

A key benefit of paying yourself via dividends is that, because dividends are not subject to NICs, there are tax advantages for companies who pay lower-rate taxes (such as the aforementioned tax-free allowances).

Conversely, for higher-rate taxpayers, choosing to pay yourself through bonuses can be conducive owing to the corporation tax changes that were implemented in 2023.

Your business may also be able to attain a full deduction on a bonus, as well as any NICS, which can provide tax relief and be advantageous to your cash flow. 

Ultimately, the decision comes down to your company’s unique financial situation and tax rates, which should help you understand the right course of action. The information below should provide clarity:

Profits of below £50,000 – taxed at 19% = £9,500

Profits of above £60,000 – taxed at marginal rates = £12,150

Final Thoughts

Managing your organisation’s finances may feel like a full-time job in itself, so oftentimes, a helping hand may be required.

At Mercury Accounting, we offer a range of services designed to help SMEs and startups put their best foot forward, financially, so that you can get on with your other tasks. Some of these services include:

  • Bookkeeping & accountancy
  • Payroll
  • VAT
  • New company/growth advice
  • And more.

For more information, get in touch today.

 

Need a helping hand?

1 Wern Road, Garnant, Ammanford, SA18 1LN

hello@mercuryaccounting.co.uk