Paying Tax on Dividends in 2024/25      

Updated on: Apr 15, 2024

Today we look at the tax impact of taking dividends in the 2024/25 tax year. While the dividend allowance has again been reduced (from £1,000 in 2023/24 to £500 in 2024/25), the tax rates and income bands are largely unchanged, and there are still ways you can receive dividends in a tax-efficient manner.

In this blog, we will walk you through the recent changes to the dividend allowance, consider its effects on your tax contributions, and introduce several tactics to reduce the impact on your tax obligations related dividend taxation in the 2024/25 tax year. For our clients operating through limited companies and relying on dividends as a key method to withdraw earnings from their businesses, understanding the tax implications of dividends is really important.

This article follows on from our Paying tax on dividends in 2023/24 and Paying tax on dividends in 2022/23 blog posts.

With knowledge of the rules and guidelines that govern dividend disbursements and investigating strategies for tax efficiency, you have the opportunity to improve your overall tax situation, avoiding any unforeseen tax charges. Let’s delve deeper and discover how to fully capitalize on your dividends in the 2024/25 financial year.

Understanding Dividends in 2024/25

Dividends are a way for companies to reward their shareholders for their investment. In the case of our contractor clients, paying dividends is a common method of extracting funds from their business. Dividends are a tax-efficient method to receive income, as they are exempt from national insurance and are included in the Personal Allowance. But, as with most things related to income, they are subject to income tax rates.

For the 2024/25 tax year, the tax-free dividend allowance has been reduced to £500. This means that you won’t have to pay tax or inform HMRC if your dividends are within this allowance. However, the reduction in the dividend allowance could lead to higher tax payments for some individuals, as more of your dividend income will be subject to taxation.

So, what does this mean for investors? With the reduced dividend allowance, the tax-free allowances available against dividends are the income tax personal allowance, and the separate dividend allowance. While this change has a small negative impact on our contractor clients, those clients who have a spouse as a shareholder are doubly impacted by this, especially if the spouse already earns a taxable income in excess of the personal allowance.

Eligibility for Receiving Dividend Payments

Shareholders have the right to receive dividend payments, which may be subject to income tax. Companies have the flexibility to distribute dividends at different times throughout the year. While public companies might issue dividends on a quarterly or annual basis, our limited company contractors are free to allocate dividends to themselves as frequently as they prefer. There’s no cap on the amount your company can distribute to you as dividends, and based on the shareholding structure of your company, it’s possible to disburse different sums to different shareholders. Nonetheless, it is critical to remember that dividends can solely be issued from the company’s profits.

We consider retained earnings as the benchmark, and on the dashboard page of the Joy Pilot accounting software that all our clients use, you can clearly see your business retained earnings. If you have no retained earnings you cannot pay any dividends.

So, before you pay yourself any dividends ensure that your company has sufficient retained earnings. We also recommend that you leave additional funds behind in your business to ensure a smooth cashflow and to ensure it can afford other things such as buying new computer equipment or investing in training.

Dividend Allowance Changes for 2024/25

The dividend allowance for the 2024/25 tax year is being cut in half again to £500, which means you may need to pay tax on a larger portion of your dividends. This new dividend allowance is lower than the tax-free allowance that was available for dividends in the previous tax year, 2023/24.

This isn’t the first time the dividend allowance has been cut. Since the 2017/18 tax year, the dividend allowance has been reduced twice, from £5,000 to the current £500. This change will affect investors and business owners alike, as the lower dividend allowance could result in higher tax payments for some individuals.

Calculating Dividend Tax Based on Income

Dividend tax is calculated according to an individual’s total income and tax band. For the 2024/25 tax year, dividend tax rates can range from 0% up to 39.35%, and your marginal rate of dividend tax is linked to your income tax band.

It’s important to understand how your total taxable income, including dividends, affects your tax liability. One key aspect of this is when looking at your overall income (to determines your tax band), your dividend income always sits on top of all other forms of income. So, if for example your income is made up of salary, dividends, bank interest, and rental income, then your dividend income will always face the highest tax bands since it is always the last form of income to be used in the tax calculation.

Just quickly, you will see that I left capital gains off the example forms of income above. An example of a capital gains might be selling some shares or crypto at a profit. Capital gains are taxed differently to income and each year you get a capital gains tax allowance that allow for some of your gains to be tax free.

Lets do an example calculation. Mia works through her own limited company, and for the 2024/25 tax year she plans to receive the following income, (a) salary of £9,096 (b) dividends of £42,000 (c) rental income (profit) of £12,000, (d) a profit of £2,500 from selling her Nvidia shares. How much tax will she pay?

Firstly, lets address the capital gain (profit) from Mia selling her Nvidia shares. For the 2024/25 tax year the annual exempt amount for capital gains tax is £3,000. Because his gain is below the threshold he does not need to report this in his personal tax return.

Now lets look at the rest of her income. Total income from all sources is 9,096 + 42,000 + 12,000 = £63,096. Lets put that into our tax table to see what the total dividend income tax will be. Note here we’re only looking at tax on dividends. Some of the income from his salary/rental property will also be taxed, but we’ll ignore that here.

	Annual income bands	Income type	Income taxed	Tax rate	Tax due
Personal allowance	Up to 12,570	Salary	9,096	0%	0
Personal allowance	Up to 12,570	Rental income	3,474	0%	0
Basic rate	Over 12,570 to 50,270	Rental income	8,526	20%	1,705
Basic rate	Over 12,570 to 50,270	Dividend income (PA)	500	0%	0
Basic rate	Over 12,570 to 50,270	Dividend income	28,674	8.75%	2,509
Higher rate	Over 50,270 to 125,140	Dividend income	12,826	33.75%	4,329
			Income tax (from Dividends)		6,838
			Income tax (from Property)		1,705

So, you can see from the tax calculation above that a payment of £42,000 in dividends in the 2024/25 tax year when factoring in the other forms of income will create a tax liability of £6,838 for the dividends and £1,705 for the property income.

Overall the dividend tax rate paid by Mia on her dividend income is 6,838/42,000 = 16.3%.

Strategies for Tax-Efficient Dividend Payments

The payment of a small salary and then dividends from your limited company is the cornerstone tax planning strategy for contractors. While you are tax resident in the UK there is no scope to further reduce the tax you pay on your dividends.

There are however various tax-efficient strategies that contractors can explore to minimize the tax impact of taking dividends from their company. Some of these strategies include the Enterprise Investment Scheme (EIS), Seed Enterprise Investment Scheme (SEIS), and Venture Capital Trusts (VCTs).

Its important to note here that while these sorts of investments decrease your overall tax liability by offering tax relief, they also require that you invest your personal cash into these schemes.

EIS and SEIS are government schemes to provide venture capital to early-stage startups. They offer generous tax advantages, encouraging private investment into these businesses. Dividends earned within the account are tax-free, offering a significant benefit. VCTs are investment schemes that offer tax advantages in the UK. Their purpose is to encourage investment in small and growing businesses.

For example, if you decided to invest £10,000 into an EIS scheme, you would get tax relief of £3,000 (30% income tax relief). So in the scenario above, Mia could draw a further £10,000 dividends from her business, which would effectively be free of tax (the tax relief she would get would almost 100% offset the tax bill created from taking more dividends).

If Mia were to invest £10,000 into an SEIS scheme her tax relief would be even greater, at £5,000 (50% income tax relief).

Paying Dividend Tax: Self Assessment Submission

Dividend tax is paid through the self-assessment submission process. The deadline for the submission of your self-assessment personal tax return is 31 January after the tax year end. Any tax due must also be paid by this date. Staying informed about changes in dividend tax rules and seeking professional assistance if needed is essential to ensure you remain compliant and avoid potential penalties.

If you need help understanding the new dividend tax rates from April 2024, or would like to understand some scenarios feel free to contact No Worries Accounting. We can not only assist with tax planning, but we also help with the preparation and submission of your self-assessment tax returns to HMRC.

Remember, there are various tax-efficient strategies and investment options available to help you minimize your tax liability in light of the reduced dividend allowance for the 2024/25 tax year, and you will find that a bit of early tax planning can really pay off.

Summary

Despite the reduced dividend allowance for the 2024/25 tax year, there are still tax-efficient strategies and investment options available to help minimize your tax liability. By understanding the rules surrounding dividend payments, staying informed about changes in dividend tax rates, and exploring tax-efficient strategies such as EIS, SEIS, and VCTs, you can continue to optimise your overall tax position.

Frequently Asked Questions

What are the dividend tax rates for 2024/25?

For the 2024/25 tax year, the dividend tax rates will remain the same as in 2023/24. See the table below for the tax rates and associated income bands.

	Annual income	Dividend tax rate
Personal allowance	Up to 12,570	0%
Basic rate	Over 12,570 to 50,270	8.75%
Higher rate	Over 50,270 to 125,140	33.75%
Additional rate	Over 125,140	39.35%

How are dividends taxed?

Taxation of dividends is completed through your self-assessment personal tax return. The deadline for the submission of your self-assessment personal tax return is 31 January after the tax year end.

What is the dividend allowance for the 2024/25 tax year?

The dividend allowance has been reduced to £500 for the 2024/25 tax year. That means you’ll be able to receive dividends up to £500 without being liable for tax regardless of how many other types of income you earn from alternative sources such as salary, rental income, and bank interest.