Dividends are a tax-efficient way for company shareholders to receive income. If you own a limited company or hold shares in a business, understanding how dividends are taxed in the UK is essential for effective tax planning. In this article, we'll break down dividend tax rates for 2023/24, explain the dividend allowance, and provide tips to help you minimise your tax liability on dividends.
What Are Dividends?
Dividends are payments made to shareholders from a company's profits after all expenses, liabilities, and corporation tax have been accounted for. For business owners operating as a limited company, dividends are often the most tax-efficient way to take income, compared to a salary.
Dividends are not considered a business expense, meaning they don’t reduce your corporation tax bill, but they do provide significant tax savings on personal income.
Dividend Tax Rates for 2023/24
In the UK, the amount of tax you pay on dividends depends on your overall income and which tax bracket you fall into. Dividend tax rates are generally lower than income tax rates, making them an attractive option for limited company directors.
For the 2023/24 tax year, the dividend tax rates are:
8.75% for basic-rate taxpayers (earnings between £12,570 and £50,270).
33.75% for higher-rate taxpayers (earnings between £50,271 and £150,000).
39.35% for additional-rate taxpayers (earnings over £150,000).
What is the Dividend Allowance for 2023/24?
The dividend allowance lets you receive a certain amount of dividend income before you have to pay tax. For the 2023/24 tax year, the dividend allowance is £1,000. This means you won’t pay any tax on the first £1,000 of dividends you receive, regardless of your other income.
However, for the 2024/25 tax year, this allowance will be reduced to £500. If you regularly receive dividends, this reduction means more of your income will be subject to tax.
How Are Dividends Taxed?
Dividend tax is applied after your personal allowance (£12,570 in 2023/24) and the dividend allowance (£1,000 in 2023/24) are used. After these allowances are applied, your remaining dividend income is taxed at the rates mentioned above, depending on which tax bracket you fall into.
Example:
Let’s say you’re a higher-rate taxpayer with a salary of £9,100 and receive £50,000 in dividends. Here’s how your tax would be calculated for the 2023/24 tax year:
Salary: £9,100 is covered by your personal allowance (£12,570), so no tax is due on your salary.
First £3,470 of dividends: This is also covered by the remaining personal allowance.
Next £1,000 of dividends: This falls under the dividend allowance and is tax-free.
Next £36,700 of dividends: Taxed at 8.75%, which equals £3,211.25.
Remaining £8,830 of dividends: Taxed at 33.75%, which equals £2,980.13.
In total, you would pay £6,191.38 in dividend tax for the year.
Dividend Tax for Basic-Rate Taxpayers
If you’re a basic-rate taxpayer (earning between £12,570 and £50,270), you’ll pay 8.75% tax on any dividends over the £1,000 dividend allowance. This makes dividends a highly tax-efficient way to take income, as it’s taxed at a lower rate than the basic income tax rate of 20%.
Dividend Tax for Higher-Rate Taxpayers
For higher-rate taxpayers (earning between £50,271 and £150,000), dividends are taxed at 33.75%. While this rate is higher, it’s still lower than the 40% income tax that would be applied to salary earnings within this bracket.
Dividend Tax for Additional-Rate Taxpayers
If you’re an additional-rate taxpayer (earning over £150,000), dividend income is taxed at 39.35%, which is also lower than the 45% income tax applied to salaries over £150,000.
How to Reduce Tax on Dividends in the UK
While dividends are already tax-efficient, there are several strategies you can use to reduce your dividend tax liability:
1. Maximise Your ISA Allowance
You can invest up to £20,000 per year in a stocks and shares ISA. Any dividends or capital gains earned within an ISA are completely tax-free, making this a powerful tool for reducing tax on your investments.
2. Use Your Spouse’s Allowance
If you’re married or in a civil partnership, consider splitting your investments to take advantage of both of your personal allowances and dividend allowances. This is particularly useful if your spouse is in a lower tax bracket.
3. Consider Timing of Dividends
Carefully timing when you take dividends can help you stay within lower tax brackets. For example, delaying dividend payments until the next tax year can help you avoid going over key thresholds, such as the higher-rate tax band.
4. Contribute to Your Pension
Making contributions to your pension can reduce your taxable income, potentially keeping you in a lower tax bracket and reducing the amount of tax you pay on dividends.
How Ultra Tax Ltd Can Help You with Dividend Tax
At Ultra Tax Ltd, we specialise in helping limited company directors and shareholders optimise their dividend tax strategies. Our expert accountants can help you:
Minimise your dividend tax liability through careful tax planning.
Maximise your allowances and ensure you’re using tax-efficient strategies like ISAs and pension contributions.
File your self-assessment tax return to ensure compliance with HMRC and avoid penalties.
We offer unlimited free consultations to help you find the best strategies to manage your income tax and dividend tax.
Conclusion: Understanding Dividend Tax in the UK
Dividend tax is a key consideration for anyone earning income through a limited company or investments. While dividend tax rates are lower than income tax rates, careful planning can help you reduce your tax bill even further. By maximising your ISA allowance, using your spouse’s allowance, and timing dividend payments strategically, you can minimise the tax you pay on dividends.
If you’re looking for personalised advice on dividend tax or need help with tax planning, contact Ultra Tax Ltd today for expert guidance.
Frequently Asked Questions (FAQs)
1. What is the dividend tax allowance for 2023/24?
The dividend tax allowance for 2023/24 is £1,000, meaning you won’t pay any tax on the first £1,000 of dividend income.
2. What are the dividend tax rates for 2023/24?
The dividend tax rates for 2023/24 are 8.75% for basic-rate taxpayers, 33.75% for higher-rate taxpayers, and 39.35% for additional-rate taxpayers.
3. How can I reduce tax on dividends?
You can reduce tax on dividends by maximising your ISA allowance, splitting income with your spouse, and contributing to your pension.
4. Do I pay National Insurance on dividends?
No, dividends are not subject to National Insurance Contributions (NICs), making them more tax-efficient than salary.
5. Can I avoid dividend tax by using an ISA?
Yes, dividends earned within a stocks and shares ISA are completely tax-free.
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