{"id":251008,"date":"2024-02-26T01:35:25","date_gmt":"2024-02-26T01:35:25","guid":{"rendered":"https:\/\/www.no-worries.co.uk\/?p=251008"},"modified":"2024-04-15T22:41:36","modified_gmt":"2024-04-15T22:41:36","slug":"tax-on-dividends-in-2024-25","status":"publish","type":"post","link":"https:\/\/www.no-worries.co.uk\/blog\/tax-on-dividends-in-2024-25\/","title":{"rendered":"Paying Tax on Dividends in 2024\/25\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0"},"content":{"rendered":"\n
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 \u00a31,000 in 2023\/24 to \u00a3500 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.<\/p>\n\n\n\n
In this blog, we will walk you through the recent changes to the dividend allowance, consider its effects on your tax contributions<\/a>, 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.<\/p>\n\n\n\n This article follows on from our Paying tax on dividends in 2023\/2<\/a>4 and Paying tax on dividends in 2022\/23<\/a> blog posts.<\/p>\n\n\n\n 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.<\/p>\n\n\n\n Email us<\/a>, call us<\/a>, our even sign up online<\/a> right away. Whatever you need, we’re here.<\/b><\/p>[\/et_pb_text][\/et_pb_column][\/et_pb_row][\/et_pb_section]<\/div>\n\n\n\n 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.<\/p>\n\n\n\n For the 2024\/25 tax year, the tax-free dividend allowance has been reduced to \u00a3500<\/a>. This means that you won\u2019t 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.<\/p>\n\n\n\n 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.<\/p>\n\n\n\n Email us<\/a>, call us<\/a>, our even sign up online<\/a> right away. Whatever you need, we’re here.<\/b><\/p>[\/et_pb_text][\/et_pb_column][\/et_pb_row][\/et_pb_section]<\/div>\n\n\n\n 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.<\/p>\n\n\n\n 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.<\/p>\n\n\n\n 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.<\/p>\n\n\n\n The dividend allowance for the 2024\/25 tax year is being cut in half again to \u00a3500, 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.<\/p>\n\n\n\n This isn\u2019t the first time the dividend allowance has been cut. Since the 2017\/18 tax year, the dividend allowance has been reduced twice, from \u00a35,000 to the current \u00a3500. This change will affect investors and business owners alike, as the lower dividend allowance could result in higher tax payments for some individuals.<\/p>\n\n\n\n Dividend tax is calculated<\/a> according to an individual\u2019s 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.<\/p>\n\n\n\n It\u2019s 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<\/a>.<\/p>\n\n\n\n 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<\/a>. Capital gains are taxed differently to income and each year you get a capital gains tax allowance<\/a> that allow for some of your gains to be tax free.<\/p>\n\n\n\n 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 \u00a39,096 (b) dividends of \u00a342,000 (c) rental income (profit) of \u00a312,000, (d) a profit of \u00a32,500 from selling her Nvidia shares. How much tax will she pay?<\/p>\n\n\n\n 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 \u00a33,000. Because his gain is below the threshold he does not need to report this in his personal tax return.<\/p>\n\n\n\n Now lets look at the rest of her income. Total income from all sources is 9,096 + 42,000 + 12,000 = \u00a363,096. Lets put that into our tax table to see what the total dividend income tax will be. Note here we\u2019re only looking at tax on dividends. Some of the income from his salary\/rental property will also be taxed, but we\u2019ll ignore that here.<\/p>\n\n\n\nLooking for an Accountant? Tax advice, planning, bookkeeping, and accounting for freelancers is what we do.<\/b><\/span><\/h2>\n
Understanding Dividends in 2024\/25<\/h2>\n\n\n\n
Looking for an Accountant? Tax advice, planning, bookkeeping, and accounting for freelancers is what we do.<\/b><\/span><\/h2>\n
Eligibility for Receiving Dividend Payments<\/strong><\/h2>\n\n\n\n
Dividend Allowance Changes for 2024\/25<\/strong><\/h2>\n\n\n\n
Calculating Dividend Tax Based on Income<\/strong><\/h2>\n\n\n\n