How Much Tax Do You Pay On Dividends?
What is a dividend and how is it paid?
You’ve more than likely heard of the word dividend, but what does it actually mean?
The word “dividend” comes from the Latin word “dividere,” which literally means “to divide.” If you’re a shareholder in a company, you’ll likely be paid dividends.
A dividend is a distribution of a portion of a company’s profits to its shareholders. It’s one of a few legal ways of taking money out of your limited company. There’s no set limits in regard to how often you can be paid dividends and this can vary from company to company and from industry to industry. However, if a limited company doesn’t generate any profit, dividends can’t be paid to its shareholders.
In order to pay dividends to shareholders, directors must have a meeting during which they declare dividends. Once dividends are declared, shareholders must receive a voucher confirming a payment of dividends. The voucher must include
- company name
- shareholder name
- amount of the dividend
- date
Dividends and tax can seem like daunting subjects, especially if you’re new to having a limited company but it’s important to understand how much tax you will pay on dividends so that you can organise your finances accordingly.
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Dividend allowance
From 6 April 2024 to 5 April 2025, the dividend allowance, so a tax-free amount, in the UK is £500.
Above this amount, you may have to pay tax on the dividends you take, but how much it will be, it will depend on the Income Tax band you belong to. The rates for different tax bands are shown further in this article.
Apart from receiving the dividend allowance, you also get your Personal Allowance which is an amount you can earn each year without paying any tax.
What tax do you pay on dividends?
As mentioned earlier, the tax rate paid on dividends depends on your tax band and the rates are:
| Tax band | Tax rate |
|---|---|
|
Basic rate |
8.75% |
|
Higher rate |
33.75% |
|
Additional rate |
39.35% |
Your tax band is calculated by adding your income from dividends to other sources of income you may have, e.g. from running a business as a sole trader. The dividends you receive may be taxed at different rates, so not the whole amount will be necessarily paid at a basic rate for example. Some of it may fall into the higher rate brackets.
Calculating your tax can be complicated and it can be confusing what rate needs to be applied, but it’s important you get things right, so you pay the right amount of tax.
Having your finances in order is key to running a successful business, but it’s also often really difficult to find time between all the other tasks you have on your plate, right? That’s why we’re here! Joanna Bookkeeping offers a full range of bookkeeping and accounting services so that you can focus on what’s most important: growing your business.
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Frequently Asked Questions
As dividends are distributed to shareholders from the profits of a limited company, they are not classified as business expenses. This means they don't get recorded in the company's Profit & Loss Statement, but they reduce the amount of equity on the Balance Sheet.
There are no rules for how often dividends can be paid but the dividends can be only paid after calculating company's profits. You can't simply transfer money out of the business to your own bank account if you're a shareholder and then call this a dividend.
Dividends are paid to shareholders, but it can happen that a shareholder is also a director in a limited company.
Dividends are paid in proportion to the shares a shareholder has in a company, so the amount of dividends that can be paid out will depend on this and also on how much profit a company has made. You don't have to distribute all profits to shareholders.
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