Dividend tax guide with calculator 2024-25

One of the many benefits of setting up a limited company is the option to pay yourself dividends on top of your director’s salary. Dividend tax rates are based on Income Tax bands, but they’re significantly lower than the corresponding rates of Income Tax. Furthermore, dividends are not subject to National Insurance, and you’ll enjoy a tax-free dividend allowance of £500 for the year.

These measures are intended to counter the Corporation Tax already paid on company profits before dividends are issued to shareholders.

• How to take money out of a limited company
• Most tax-efficient director’s salary and dividends for 2024-25
• 2024-25 tax guide for UK business owners

Whilst the potential tax savings from dividends are not as great as they were a few years ago, running a limited company can still be more tax-efficient than operating as a sole trader if you plan and arrange your remuneration carefully.

So, let’s take a look at the current dividend tax rates for the 2024-25 tax year and the amount of personal tax you will pay as a limited company director and shareholder.

Dividend tax rates for the 2024-25 tax year

Dividend tax rates and allowances sometimes change at the start of the tax year. They are based on Income Tax bands and thresholds, so the amount of tax you pay on dividends depends on your total taxable income from all sources.

You won’t pay any dividend tax on income that’s within your annual Personal Allowance, which is currently £12,570. The first £500 of dividend income in the year will also be tax-free. This means that you can earn up to £13,070 before you have to start paying tax.

For the 2024-25 tax year, which runs from 6 April 2024 to 5 April 2025, the following rates of dividend tax apply:

• 8.75% (basic rate) – taxable income between £12,570 and £50,270
• 33.75% (higher rate) – taxable income between £50,271 and £125,140
• 39.35% (additional rate) – taxable income above £125,140

To work out your tax band, simply add your annual dividend income to your other sources of income (e.g. director’s salary, expenses). Depending on your total taxable income for the year, you may pay tax on dividends at more than one rate.

Whilst Income Tax rates and thresholds often vary between UK nations, you will use the bands set by the UK government when working out your tax on dividends.

Let’s take a look at a few limited company remuneration examples to understand how this works.

Example 1

You receive a total annual income of £13,070. This is made up of £12,570 salary + £500 dividends.

• You are a basic-rate taxpayer
• You won’t pay any dividend tax because of the £500 divided allowance
• Your salary is within your tax-free Personal Allowance (PA), so you won’t pay any Income Tax
• You won’t be liable to employee Class 1 National Insurance contributions (NIC) because your salary does not exceed the NIC primary threshold (£12,570)
• The company will pay 13.8% employer’s Class 1 NIC on your salary above £9,100 per year (NIC secondary threshold) = £479
• Total deductions on this income = £479

Example 2

You receive a total annual income of £13,070. This is made up of £9,100 salary + £3,970 dividends.

• You are a basic-rate taxpayer
• Your salary is within your PA, so you won’t pay any Income Tax
• You won’t pay employee Class 1 NIC on your salary because it’s below the primary threshold
• The company won’t be liable to employer’s Class 1 NIC on your salary because it’s below the secondary threshold
• Your first £500 of dividends will be tax-free, and the remaining £3,470 of dividends will be covered by your PA
• Total deductions on this income = £0.00

Example 3

You receive a total annual income of £50,000. This is made up of £9,100 salary + £40,900 dividends:

• You are a basic-rate taxpayer
• Your salary is within your PA, so you won’t pay any Income Tax
• You won’t pay employee Class 1 NIC on your salary because it’s below the primary threshold
• The company won’t be liable to employer’s NIC on your salary because it’s below the secondary threshold
• £3,970 of dividends will be tax-free on account of the £500 dividend allowance and your remaining PA
• You’ll pay 8.75% dividend tax on the remaining £36,930 of dividend income = £3,231
• Total deductions on this income = £3,231

Example 4

You receive a total annual income of £80,000. This is made up of £9,100 salary + £70,900 dividends:

• You are a higher-rate taxpayer
• Your salary is within your PA, so you won’t pay any Income Tax
• You won’t pay employee Class 1 NIC on your salary
• The company won’t be liable to employer’s NIC on your salary
• £3,970 of dividends will be tax-free on account of the £500 dividend allowance and your remaining PA
• You’ll pay 8.75% dividend tax on £37,200 of dividends = £3,255
• You will pay 33.75% dividend tax on the remaining £29,730 of dividends = £10,033
• Total deductions on this income = £13,288

Is dividend income covered by my Personal Allowance?

Some or all of your dividend income will be covered by your Personal Allowance if your salary is below £12,570.

For example, if you take dividends of £13,070 and don’t have any income from other sources, you won’t pay any personal tax on this dividend income.

The first £500 will be covered by the tax-free dividend allowance, and the remaining £12,570 will be covered by your Personal Allowance.

Dividend tax on shares in ISAs and pensions

Dividends from shares held in an ISA are tax-free and have no impact on your dividend allowance. You can save £20,000 of dividend income in stocks and shares ISAs during the 2024-25 tax year. Moreover, any profits generated from investments in your stocks and shares ISAs are free of Capital Gains Tax.

Dividend income received in a pension fund is also tax-free while the funds remain in the pension. When this income is withdrawn, the dividends will be taxed in line with the pension withdrawal rules that exist at that time.