Dividend tax is paid by shareholders to HMRC on any dividends that they receive from a company. For those who run a limited company in the UK, receiving dividends is widely regarded as the most tax-efficient way of taking money from their business. In this article we will explain everything that you need to know about UK dividend tax in 2023 and 2024 including how company dividends work, the rates of dividend tax, dividend tax allowances and how to declare dividend tax to HMRC.
What is a dividend?
A dividend is an amount of money that is paid by a company to its shareholders from any profits made after Corporation tax has been deducted. In other words, a dividend is a distribution of profits made by a company to its shareholders.
Large companies often pay dividends as a way of rewarding their shareholders and attracting potential investors. This is because, by making regular and consistent dividend payments, a company can increase its attractiveness to those considering making an investment. Not all companies pay dividends to their shareholders, preferring instead to reinvest all of their profits back into the business to fund further expansion, research, and development. This is especially true for companies experiencing rapid growth and those in high-tech sectors.
Dividends are typically paid to company shareholders quarterly or annually but can be paid at any time in the form of cash or shares. If you run your own company then you can pay dividends at any point as long as it is paid from your profits.
Who can receive dividends?
You can receive a dividend if you are a shareholder in a company. This includes owning shares in a company as an investor. You can also pay yourself dividends if you are a majority shareholder in your own company. For example, if you own a company in which you hold all of the shares, or if you have a 50/50 share with a partner, then you can pay yourself in the form of dividends from the available company profits.
How are dividends taxed in the UK?
Depending on how much you receive in the form of dividends from a company in which you own shares, you may need to pay dividend tax to HMRC. If you receive less than the dividend tax allowance then you will pay no dividend tax at all. If you receive more than the allowance then you will need to pay some tax. It is important to understand that it is you, as a shareholder, who is personally responsible for paying dividend tax to HMRC, not your company. How much dividend tax you owe is calculated and declared through HMRC’s Self Assessment.
Unfortunately, the dividend allowance has been slowly reduced each year since 2017. In 2017 the amount that a company shareholder could receive in dividends before paying dividend tax was £5,000. For the current tax year (from 6th April 2023 to 5th April 2024) this is now only £1,000. More and more shareholders therefore find themselves paying dividend tax in the UK each year.
Are company dividends tax efficient?
Running your business as a limited company can represent a tax-effective way of paying yourself. This is because the rates of tax payable on dividends is much lower than for income tax paid on salaries, as follows:
|Tax threshold amount
|£50,271 to £150,000
|Income tax rates
|Dividend tax rates
In addition, National Insurance is not paid on any dividends that you pay yourself. This is the case both for employer and employee National Insurance Contributions (NICs). Receiving the majority of your income in dividends can reduce your income tax bill significantly.
What are the disadvantages of receiving company dividends?
Although there are potentially significant benefits in paying yourself dividends to reduce your tax liability, there are disadvantages of which to be aware.
Dividends can be paid out of your company profits only after corporation tax has been taken into account. This means that if you take too much in dividends then you may need to repay the amount as a director’s loan. For this reason it is important to keep a close eye on the dividends that you pay yourself. If you accidentally take a dividend that is not covered by profits then this must be properly accounted-for on your company’s balance sheet.
Another disadvantage of taking dividends is that dividend tax is paid after corporation tax. A salary, on the other hand, is considered by HMRC as a tax-deductible expense.
How do I pay myself dividends from my company?
As mentioned above, you are free to pay yourself dividends from your company whenever and as often as you like. This is as long as you are paying any dividends from profit and you have allowed for corporation tax.
The HMRC rules state that you should hold a directors’ meeting during which you declare the dividends to be paid out. This applies even if you are a sole director. Any decisions that you make on paying dividends should be officially recorded in the minutes of the meeting.
Each dividend must have a corresponding dividend voucher with the following:
- Date of the dividend
- The company name
- Shareholder names
- The dividend amount.
To make this easier, many dividend tools and templates are available online.
What are the dividend tax rates for 2023/24?
The dividend tax that you must pay HMRC will depend on the dividends that you have received above the allowance. The dividend rates for the tax year 2023 to 2024 are as follows:
|Tax rate on dividends over the allowance
These rates have increased from 2021/21 when the rates were 7.5% (basic rate), 32.5% (higher rate) and 38.1% (additional rate).
How much personal tax will I pay in 2023/2024?
The personal tax that you must pay in 2023/24 will depend on how much you receive in salary and dividends. If you pay yourself in dividends then you can potentially earn up to £13,570 before you pay personal tax. This is the basic rate income tax allowance of £12,570 plus your dividend allowance of £1,000.
Here are some examples:
- If you receive £10,000 in dividends and a salary of £2,400 (£200 per month) in the tax year 2023 to 2024 then you will pay no personal tax.
- If you receive £13,570 in dividends and no salary in the tax year 2023 to 2024 then you will pay no personal tax.
- If you receive £30,000 in dividends and a salary of £12,570 in the tax year 2023 to 2024 then you will pay a dividend tax of £2,557.50 (i.e. dividend received of £30,000 less the dividend tax allowance of £1,000 = £29,000 multiplied by the basic dividend tax rate of 8.75%)
How do I declare dividend tax to HMRC?
If the amount you receive in dividends is below the dividend tax threshold of £1,000, you do not need to inform HMRC. If the amount you receive in dividends is £10,000 or less in the tax year, you have two ways to declare the tax you owe. You can either ask HMRC to change your tax code, allowing the amount you owe to be taken from your wages or pension. Alternatively, you can declare your dividends in a Self-Assessment tax return.
If the amount that you receive in dividends exceeds £10,000 then you must declare your dividends in a Self-Assessment tax return. If you have accountants then they will normally handle both your Corporation Tax Return and your Self-Assessment Tax Return on your behalf. When completing your Self-Assessment Tax Return you will be asked to declare how much you have received in dividends from UK companies.
Any money that you take from your company which is not a salary, dividend or expense will be classed as a director’s loan. You will need to create and keep a record of any money you borrow from – or pay into – your company’s “director’s loan account”. Your accountant will include any money that you owe your company, or that your company owes you, on the balance sheet.
If you receive dividends either from your own company or from another company in which you own shares then you may need to pay dividend tax to HMRC. Seeking professional advice for dividend tax in the UK is key to ensuring that you have the most tax-efficient arrangement for your needs. Tax professionals such as accountants understand the latest insights into regulations, helping you navigate complexities and make informed decisions.
Your accountants will help you take advantage of the allowances available and ensure that your dividends are properly declared to HMRC by preparing and filing your Self-Assessment Return. At Uniwide Formations we have partnered with a highly-rated accountancy firm with expertise in providing accounting and tax services to new businesses. If you need accountants whom you can trust then we offer a free introduction to them for our valued clients.