Dividends Explained: What They Are, Who Gets Them & The Tax You’ll Pay
Dividends often come up in conversations about business finance and investments, but many people still find them a little confusing, especially when it comes to tax. If you’re running a limited company or investing in shares, understanding dividends could help you manage your income more tax-efficiently.
Here’s a clear, jargon-free guide to what dividends are, how they work, and the tax you’ll owe when you receive them.
What Is a Dividend?
A dividend is a payment made to shareholders from a company’s retained profits, after it has paid its Corporation Tax and other liabilities.
In simple terms:
- If you own shares in a limited company that’s made a profit, you could be entitled to a share of those profits – known as a dividend.
- If you’re a sole trader, unfortunately, dividends aren’t an option. Only limited companies can pay dividends to their shareholders.
Dividend Tax Rates (2024/25)
Dividends don’t get taxed the same way as salary or other forms of income. They come with their own set of tax bands, which can make them a very tax-efficient way to take money from a company.
Here are the dividend tax rates for the 2024/25 tax year:
| Total Income | Dividend Tax Rate |
|---|---|
| Up to £12,570 | 0% (covered by the Personal Allowance) |
| £12,571 – £50,270 (Basic Tax Rate Payers) | 8.75% |
| £50,271 – £125,140 (Higher Tax Rate Payers) | 33.75% |
| £125,140+ (Additional Tax Rate Payers) | 39.35% |
Plus:
- £500 Dividend Allowance: The first £500 of your dividend income is tax-free.
- No National Insurance: Unlike salary, you don’t pay NI on dividends.
- Tax-Free in ISAs: Dividends earned within a Stocks & Shares ISA are entirely tax-free.
- Top Slice Notes: Dividends are treated as your top slice of income, so your personal allowance, basic and higher rate bands are allocated against other income first (such as your employment income).
How Are Dividends Paid?
Before a company can pay dividends, the directors must:
- Check the company has sufficient post-tax profits.
- Declare the dividend: a formal process confirming the amount to be paid.
- Record it in the company’s minutes and issue dividend vouchers to shareholders.
In other words, dividends are only paid from genuine profits, they can’t be conjured up if the company isn’t performing well financially.
A shareholders agreement and/or the rights associated with the shares owned can impact what dividends are paid.
Why Dividends Matter
Dividends can be a tax-efficient way to extract money from a limited company compared to drawing a large salary, especially when used alongside a modest salary to utilise personal tax allowances, because dividends aren’t subject to employers and employees national insurance.
If you’re a business owner or considering investing, understanding dividends is key to smarter income planning.
Final Thoughts
If you’re running a limited company, or simply investing in shares, make sure dividends form part of your broader tax strategy. And don’t forget, tax rules can change and so tax planning is advisable.
Have more questions about dividends, tax strategies, or running a limited company? We can support you with your basic tax planning and help providing you with clarity over your numbers.
If you’re not a client of Brisan, we can offer you 15 minutes of free expert advice to support you with your queries.
