For the tax year 6th April 2024 to 5th April 2025, the dividend tax allowance has halved from £1,000 to just £500. This marks a considerable reduction in the amount of tax paid on shareholder dividends over time. In the 2016/17 tax year, the dividend tax rate was £5,000, ten times more than the allowance available today. In this article, we will explain the new dividend allowance rules for the current tax year (2024/25) and provide some examples to help you understand the effect that this hike will have on your tax position.
Main Points: Dividend Allowance Changes 2024/25
- Dividend Allowance Reduced to £500: From 6th April 2024, the tax-free dividend allowance has halved from £1,000 to £500, meaning you will now pay tax on dividends over £500.
- Higher Tax Bills for Shareholders: Small business owners and shareholders receiving dividends will face increased tax liabilities, affecting how you plan your income and withdrawals from your company.
- Understanding Dividend Tax Rates: Dividend tax rates depend on your income tax band, making it important to know how the reduced allowance impacts your tax obligations.
- Using ISAs to Reduce Tax: Investing in ISAs or pensions can help lower your dividend tax liability, as dividends within these accounts are not subject to dividend tax.
- Reporting Dividend Income: Ensure you declare any dividend income over £500 to HMRC, either by adjusting your tax code or completing a Self Assessment tax return if required.
What are the new dividend allowances for 2024/25?
For the current 2024/25 tax year, all taxpayers will pay an annual tax-free dividend allowance of £500. This means that income received in the form of dividends over £500 is taxable by HMRC.
This means that if you receive an income of £13,070 in dividends in the tax year 2024/25, you will have no tax to pay. The first £12,570 will be covered by your personal allowance and the remaining £500 by your dividend allowance.
What are the Income and Dividend Tax Rates for 2024/25?
The rate at which you pay tax on dividends will depend on your income tax band. The following table shows the updated dividend tax rates for the 2024/25 tax year:
Income tax and dividend tax rates for England, Wales & Northern Ireland in 2024/25
| Tax band | Taxable income | Income Tax rate | Dividend tax rate |
|---|---|---|---|
|
Personal Allowance |
Income of 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% |
Income tax and dividend tax rates for Scotland in 2024/25
| Tax band | Taxable income | Income Tax rate | Dividend tax rate |
|---|---|---|---|
|
Personal Allowance |
Income of 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% |
How much tax will I pay on income and dividends in 2024/25?
The exact amount of tax that you will pay for this tax year will depend on how much you earn and whether dividends represent your only form of income or whether you receive a combination of dividends and a salary. Here are some examples (based on the rates for England and Wales) to help you understand how much tax you may pay in 2024 / 25 on your dividends income.
Example 1: You receive £12,000 in dividends in the tax year 2024/24
- Your dividend tax allowance is £500.
- Because the remaining amount of £11,500 is below your income tax allowance of £12,570, you have no dividend tax to pay.
Example 2: You receive £40,000 in dividends in the tax year 2024/24
- Your dividend tax allowance is £500.
- Once your tax-free Personal Allowance of £12,570 is deducted, you will need to pay dividend tax at the basic rate of 8.75% on the remainder of £26,930.
- Your dividend tax bill will, therefore, be £2,356.
Example 3: You receive £3,000 in dividends and a salary of £29,570 from your company:
- Your total income is £32,570.
- You have a Personal Allowance of £12,570, leaving you a taxable income of £20,000.
- You will pay 20% tax on £17,000 of your salary: £3,400
- You will pay 8.75% tax on £2,500 of the dividend: £219.
How has the dividend allowance changed in recent years?
For the tax year 2022/23, the dividend allowance was set at £2,000. Last year, this was halved to £1,000, and it has been halved again for the tax year 2024/25. The changes to the dividend allowance 2024/25 reflect the current government’s efforts to increase tax revenues.
This reduction will affect many small business owners and shareholders who receive all or part of their income in the form of dividends. Indeed, it is estimated that around 1.8 million more people will need to pay dividend tax net as a result of the reduction in the tax-free allowance this year.
What is a dividend?
Simply put, a dividend is the distribution of any profits made by a company to its shareholders. You may receive a dividend if you hold shares in a company as an investment or if you run a company in the UK. As such, it is just one way to take money out of a company in the UK; the others include salary, expenses, benefits, and directors’ loans.
To reduce the amount of tax paid to HMRC, many limited company owners receive their income in the form of dividends and a salary. If you pay yourself a dividend through your company, it is essential that you only do so from profits. It is illegal to pay dividends without sufficient earnings to cover the amount.
What is a dividend voucher?
It is also important to follow the correct process when paying yourself a dividend. You are supposed to hold a meeting of directors to “declare” the dividend being paid. A record of the meeting and the agreement to pay the dividend should also be made (this is called a ‘dividend voucher’.
Your dividend voucher should contain the date of the dividend, the company name, the names of the shareholders being paid a dividend, and the amount of the dividend.
How are dividends taxed in the UK?
For those who receive dividends as a shareholder, it is important to understand how dividends are taxed in the UK. The dividend allowance was introduced following changes to the tax rules in April 2016, which resulted in the abolishment of the dividend tax credit.
The dividend allowance is a tax-free amount that individuals can earn from dividends before paying any tax to HMRC. You may receive company dividends if you own shares in a company (e.g. if you are a limited company owner).
You will not pay tax on any dividend income that falls within your Personal Allowance. Your Personal Allowance is the amount of income you can earn each year without paying taxes. This is currently £12,570 for the 2024/25 tax year. In addition, you do not pay tax on dividends from shares held in an ISA (see below for more details).
Can I reduce my dividend tax liability by investing in an ISA?
Given the significant increase in the Dividend Tax Allowance for 2024/25, there are some ways that you can reduce the amount of tax payable. One way is to invest in an ISA or pension, which are not subject to dividend tax. The annual ISA allowance is currently £20,000, meaning that by using up your allowance each year, you can significantly the amount of tax due.
You may also be able to use your spouse’s unused ISA allowance, further reducing the amount of tax you pay. To discuss your options and how to use ISAs to your advantage, speak to an accountant in the UK. Based on your personal circumstances, they will be able to advise on how you can use the available strategies to reduce your dividend tax liabilities.
The importance of seeking professional financial advice
When it comes to navigating the changes to the dividend allowance for 2024/25, it cannot be overemphasised how important it is to seek professional advice. Engaging the services of a specialist tax advisor or accountant in the UK can help you understand your specific situation and develop a tailored strategy to manage your dividend income effectively.
At Uniwide Formations, we can introduce you to an accountant in the UK who can advise on dividend tax, help you to keep track of your finances, prepare your annual accounts, deal with your Corporation Tax Return filing and any other filings, and run your payroll.
How do I declare any dividend tax owing to HMRC?
If you owe tax on up to £10,000 in dividends, you can inform HMRC by either:
- Contacting the HMRC helpline,
- Asking HMRC to change your tax code (they will take the tax owning from your wages or pension), or
- Putting the details of your dividend tax liability in your Self Assessment tax return.
If your dividends fall within the dividend allowance for the tax year, there is no need to notify HMRC.
Submitting a self-assessment tax return
If you owe tax on over £10,000 in dividends, you must complete and submit a Self Assessment tax return. Most business people and investors use an accountant to prepare their Self-Assessment tax return to ensure that it is done correctly.
The rules also state that if you do not usually send a tax return, you need to register for self-assessment by 5th October following the tax year that you received the dividend income.
Final words
The changes to the dividend allowance for 2024/25 represent a significant shift in how dividend income is taxed. With the allowance reduced to £500, business owners and investors may need to review their financial strategies. By understanding these changes and implementing effective tax planning measures, you can optimise your income and ensure compliance with the new rules.
