Important update to the dividend allowance – 2024/25

On 6 April 2024, the annual dividend allowance was reduced from £1,000 to £500, which is disappointing news for shareholders. Here’s everything you need to know about this important update.

What is the dividend tax allowance?

The dividend allowance is the total amount of dividends you can receive in a year before you must start paying tax on them. It was reduced to £500 for the 2024/25 tax year—a 50% cut on the previous year’s allowance. Dividend payments that are issued through ISAs remain tax-free.

All shareholders are entitled to the dividend allowance, regardless of how much they earn in a year. Therefore, if you receive dividends of £500 or less in the tax year, you won’t pay any tax on that income. 

When annual dividend income exceeds the allowance, dividend tax is payable at increasing rates based on your total annual earnings from all sources (i.e. whether you’re a basic-rate, higher-rate, or additional-rate taxpayer).

What you need to pay if you go over the dividend allowance

The amount of tax that you need to pay once you exceed the dividend allowance is connected to your Income Tax band.

To ascertain your tax band, you need to work out your total earnings for the year by adding your other sources of income (e.g. your regular salary) to your dividend income.

Taxpayers in Scotland pay tax on dividends according to the regular UK tax bands, but Scottish Income Tax rates apply to all other sources of income.

England, Wales & Northern Ireland tax bands and dividend tax rates 2024/25

Band	Taxable income	Tax rate	Dividend tax rate
Personal Allowance	Anything up to £12,570	0%	0%*
Basic	£12,571 to £50,270	20%	8.75%
Higher	£50,271 to £125,140	40%	33.75%
Additional	More than £125,140	45%	39.35%

Scottish tax bands and dividend tax rates 2024/25

Band	Taxable income	Tax rate	Dividend tax rate
Personal Allowance	Anything up to £12,570	0%	0%*
Starter	£12,571 to £14,876	19%	8.75%
Basic	£14,877 to £26,561	20%	8.75%
Intermediate	£26,562 to £43,662	21%	8.75%
Higher	£43,663 to £50,270	42%	8.75%
Higher	£50,271 to £75,000	42%	33.75%
Advanced	£75,001 to £125,140	45%	33.75%
Top	More than £125,140	48%	39.35%

*If a dividend payment is your only form of income, you won’t pay any tax on your dividends until the payments surpass £13,070 in a tax year. This is the combined total of the Personal Allowance (the annual amount you can earn before you are required to pay tax) plus the £500 dividend allowance.

To give you a better idea of what you may have to pay, let’s take a look at some examples.

Example 1

For the 2024/25 financial year, you receive £10,000 in dividends. This is your only income for the year.

• The first £500 of dividend income is tax-free due to the annual dividend allowance
• The remaining £9,500 is within your tax-free Personal Allowance (£12,570)
• None of this income is taxable, so you can keep the whole £10,000

Example 2

You receive a £25,000 dividend payment. This is your only income for the year.

• £25,000 places you in the basic rate taxpayer bracket (£12,571-£50,270)
• The first £500 is tax-free due to the annual dividend allowance
• The next £12,570 is covered by your tax-free Personal Allowance
• Your taxable income is the remaining £11,930
• You must pay 8.75% dividend tax (the basic rate) on this amount = £1,044
• Your take-home dividend income for the year is £23,956

Example 3

You receive a £15,000 dividend payment and a salary of £40,000. Combined, this takes your earnings to £55,000.

• £55,000 places you in the higher rate taxpayer bracket (£50,271-£125,140)
• The first £500 of dividend income is tax-free due to the annual dividend allowance
• £12,570 of salary income is covered by your tax-free Personal Allowance
• Your taxable income is the remaining £41,930 (£14,500 dividends plus £27,430 salary)
• You pay 20% Income Tax (the basic rate) and 8% Class 1 National Insurance contributions (NIC) on the remaining £27,430 of salary income = £5,486 Income Tax and £2,194 NIC
• You pay 8.75% dividend tax (the basic rate) on £9,770 of dividend income = £855
• The remaining £4,730 of dividend income will be taxed at 33.75% (the higher rate) = £1,596
• Your take-home income for the year is £44,869

Example 4

You’re a taxpayer in Scotland. For the 2024/25 financial year, you receive a £15,000 dividend payment and a salary of £40,000. Your combined income for the year is £55,000.

• Your salary places you in the intermediate tax band for Scottish Income Tax, but your combined earnings of £55,000 place you in the UK higher rate taxpayer bracket (£50,271 – £125,140) for dividend tax
• The first £500 of dividend income is tax-free due to the annual dividend allowance
• £12,570 of salary income is covered by your tax-free Personal Allowance
• Your taxable income is the remaining £41,930 (£14,500 dividends plus £27,430 salary)
• You will pay the following rates of Scottish Income Tax on your salary:
  • 19% (the starter rate) between £12,571 and £14,876 = £438
  • 20% (the basic rate) between £14,877 and £26,561 = £2,337
  • 21% (the intermediate rate) between £26,562 and £40,000 = £2,822
• You’ll pay 8% Class 1 NIC on your salary above £12,570 = £2,194
• You’ll pay 8.75% dividend tax (the basic rate) on £9,770 of dividend income = £855
• The remaining £4,730 of dividend income will be taxed at 33.75% (the higher rate) = £1,596
• Your take-home income for the year is £44,758

How to minimise your dividend tax liability

There are certain strategies you can use to legally minimise the amount of tax you pay on dividends. However, we always recommend consulting an accountant or tax advisor for professional help. Doing so ensures you make the most tax-efficient decisions and remain legally compliant.

Issue shares to your spouse or partner

Suppose your spouse or civil partner has unused Personal Allowance or is in a lower Income Tax bracket than you. In that case, it may be beneficial to make them a shareholder in your limited company and pay them dividends. Doing so could maintain your household’s gross annual income while reducing your tax liability. 

• Tax implications of transferring shares to your spouse or partner

While HMRC has tried to legislate against such strategies in the past, it remains legal to distribute share ownership (and thus dividend income) by issuing or transferring shares to your spouse or civil partner.

Make pension contributions

Since pension contributions qualify for tax relief, setting up a pension (or making additional payments into an existing one) will reduce your taxable income. In turn, this may take you into a lower tax band and reduce the tax you pay on your dividend income.

Investing through ISAs

Dividends from shares held in stocks and shares ISAs are tax-free, making them a tax-efficient way to receive dividend income. In the current 2024/25 tax year, you can save up to £20,000 tax-free in ISAs, meaning you can receive up to £20,000 of dividend income in an ISA without any dividend tax liability.

How to pay tax on dividends 

Tax on dividends is usually payable through Self Assessment. If you receive more than £10,000 in dividends, you must report the income to HMRC on a Self Assessment tax return after the end of the tax year. 

For example, if you receive dividend income in the 2024/25 tax year, you have until 31 January 2026 to file a Self Assessment tax return and pay any tax you owe. 

• How to register for Self Assessment
• Do I need to register for Self Assessment if I run a Ltd company?
• Most tax-efficient director’s salary and dividends for 2024-25

If you owe any tax on your dividends, the deadlines for paying your Self Assessment tax bill are usually:

• 31 January – for tax you owe for the previous tax year (this is known as a balancing payment) and your first ‘payment on account‘ (if your previous year’s bill was more than £1,000) 
• 31 July for your second payment on account (if applicable) 

Alternatively, if your dividend income is £10,000 or less, you can tell HMRC by:

• contacting the Income Tax helpline
• asking HMRC to change your tax code and deduct the dividend tax from your wages or pension

You do not need to tell HMRC if your dividends are within the £500 dividend allowance for the tax year.

Thanks for reading

We hope you have found this post helpful. Be sure to check the 1st Formations Blog for more limited company guidance and small business advice. Please leave a comment if you have any questions.