Tax on Dividends: What You Need to Know for 2024/25

Introduction: What Are Dividends?

Dividends are payments made by a company to its shareholders as a way of distributing profits. In simple terms, if you hold shares in a company and that company chooses to share some of its profits, you may receive dividends. These can come from listed companies, private businesses, or even your own limited company if you are both director and shareholder.

Understanding how dividends are taxed is essential for anyone who receives them — whether you are an individual investor or a business owner. Below, we break down HMRC’s guidance into clear, practical steps.

Do You Have to Pay Tax on Dividends?

Not all dividends are taxable. There are two key allowances that can reduce or eliminate your liability:

• Personal Allowance – the first £12,570 of your total income (including wages, dividends, etc.) is tax-free, provided you have not already used it.

• Dividend Allowance – in addition to the personal allowance, you can receive a certain amount of dividend income each year tax-free.

Dividend Allowance by Tax Year

6 April 2024 to 5 April 2025: £500

• 6 April 2023 to 5 April 2024: £1,000

• 6 April 2022 to 5 April 2023: £2,000

• 6 April 2021 to 5 April 2022: £2,000

Dividends received within an ISA remain tax-free regardless of these thresholds.

How Dividends Are Taxed

Once your personal allowance and dividend allowance have been used up, the tax rate you pay depends on your Income Tax band:

• Basic Rate (20% band): 8.75% on dividends

• Higher Rate (40% band): 33.75% on dividends

• Additional Rate (45% band): 39.35% on dividends

Your tax band is determined by combining your dividend income with your other taxable income (such as salary, rental income, or self-employment earnings).

Example: Dividends in Practice

Let’s walk through a simple case study:

• You earn £29,570 in wages and £3,000 in dividends during the 2024/25 tax year.

• Your total income is £32,570.

• Subtract the personal allowance of £12,570, leaving a taxable income of £20,000.

How This Income Is Taxed

£17,000 of wages at the 20% basic rate.

• £500 of dividends are tax-free (dividend allowance).

• The remaining £2,500 of dividends are taxed at 8.75%, which equals £218.75.

This case shows how even a modest dividend payment can be partially sheltered from tax before any liability arises.

Dividends as Part of Tax Planning

For many business owners operating through a limited company, dividends form a key part of an overall tax planning strategy. Rather than paying all income as salary — which attracts Income Tax and National Insurance — withdrawing some profits as dividends can often reduce the total tax burden.

Historically, dividend tax rates have been lower than the equivalent income tax rates, making them an attractive option for directors and shareholders. For example, basic rate taxpayers pay 8.75% on dividends above the allowance, compared to 20% on employment income.

While corporation tax is still payable on company profits before dividends are distributed, the combined structure can often be more efficient than drawing a full salary.

This approach sits within the wider comparison between limited companies and sole traders, where the methods of extracting profits differ. We explore this in greater detail in our article on Sole Trader vs Limited Company.

Do You Need to Tell HMRC?

If your dividend payments exceed both:

1. Your unused Personal Allowance, and

2. Your Dividend Allowance

…then you must report this income to HMRC. This is usually done via a Self Assessment tax return.

References & Further Insight 📘

This article has been prepared using official guidance from HMRC.

For a deeper look at how dividend taxation applies in specific scenarios, we have created a practical case study that explores dividend planning for business owners. Read the case study here.