UK Dividend Tax Explained: A Step-by-Step Guide by Filing Accounts

If you’re running a limited company or planning to start one, understanding how dividends work—and how they are taxed—can be crucial for managing your finances efficiently. Dividends offer a tax-efficient way for company directors and shareholders to extract profits from the business. This guide explains UK dividend tax rules for the 2024/25 and 2025/26 tax years, how dividends work, how to issue them correctly, and what tax you’ll owe.

What Is a Dividend?

Imagine your company finishes the year with profits left over after paying all expenses, bills, and Corporation Tax. Those leftover profits can be distributed to shareholders as dividends. Dividends essentially represent a share of the company’s profit paid to the people who own its shares.

• Dividends are paid after Corporation Tax.

• They are not a deductible business expense.

• They must only be paid out of post-tax profits (i.e., your company cannot pay dividends if it’s not made a sufficient profit).

For example, if your company makes a profit of £50,000 after tax, and you own 100% of the shares, you could decide to pay yourself a dividend of up to £50,000 (assuming no other shareholders and no retained profits from previous years).

How Does Your Company Issue a Dividend?

Here is the correct process to issue dividends:

1. The directors must hold a meeting to formally declare the dividend. This decision must be recorded in meeting minutes.

2. The company generates a dividend voucher for each dividend payment. This voucher records:

   • Date of payment

   • Company name

   • Shareholder(s) receiving the dividend

   • Amount of the dividend

3. Shareholders receive their dividend payment according to their shareholding percentage.

Example:

Let’s say your company has two shareholders: you own 70%, and your business partner owns 30%. If you declare a £10,000 dividend, you receive £7,000 and your partner receives £3,000.

Understanding Tax on Dividends

Why Dividends Are Tax-Efficient

When you run a limited company, you typically pay yourself in two ways:

• A salary (subject to Income Tax and National Insurance Contributions or NICs)

• Dividends (subject to dividend tax but no NICs)

Since dividends don’t attract NICs, paying yourself via dividends alongside a modest salary is often the best way to minimise tax and NICs combined.

The Annual Tax-Free Dividend Allowance

For tax years 2024/25 and 2025/26, you can earn up to £500 tax-free from dividends in addition to your personal allowance of £12,570.

• You pay no tax on dividends up to £500.

• You also have a Personal Allowance (£12,570) which usually applies to salary or other income.

Example:

• Sarah earns £12,570 in salary (using up her personal allowance).

• She receives £600 in dividends.

• The first £500 of dividends is tax-free (dividend allowance).

• Only the remaining £100 in dividends is taxed according to her tax band.

Dividend Tax Rates for 2024/25 and 2025/26

Once you exceed your Personal Allowance and dividend allowance, your dividends are taxed based on your overall income tax band:

Real-Life Example – Calculating Dividend Tax

Suppose Tom is a limited company director with the following income in 2024/25:

• Salary: £15,000 (above his personal allowance of £12,570)

• Dividends: £20,000

Step 1: Calculate taxable salary

• £15,000 salary – £12,570 personal allowance = £2,430 taxable salary taxed at 20% (basic rate)

Step 2: Calculate dividend allowance

• Dividend allowance = £500 tax-free dividends

Step 3: Calculate taxable dividends

• £20,000 dividends – £500 dividend allowance = £19,500 taxed on dividend tax rates

Step 4: Determine tax band for dividends

• Total income before dividends = £15,000 (salary)

• Dividends push total taxable income to £35,000

• As this is within the basic rate band, dividends are taxed at 8.75%

Step 5: Calculate dividend tax

• £19,500 × 8.75% = £1,706.25

So, Tom owes £1,706.25 in dividend tax plus income tax on his salary.

Reporting Dividends to HMRC

If your dividend income (combined with other income) exceeds your allowances, you must report it on a Self Assessment tax return. Often, you will receive a notice from HMRC if you need to complete one.

Key Points to Remember

• Dividends can only be paid from available post-tax profits.

• Keep detailed records: board minutes and dividend vouchers.

• You can take advantage of the £500 dividend allowance and your personal allowance.

• Dividends are not liable for NICs, saving you money compared to sole salary.

• Tax rates on dividends are lower than standard income tax rates.

• Scottish taxpayers calculate dividend tax using UK rates despite different income tax bands.

Unlock Savings with Filing Accounts

Running your business tax-efficiently means optimising dividend payments alongside salary planning. To get the most out of your limited company finances, keep up with dividend tax rules and allowances, and talk to experts if you’re unsure. 

If you want to make the most of your dividends while staying legally compliant, let Filing Accounts guide you every step of the way.

Full detailed information on this  can be found on HMRC guidance; https://www.gov.uk/tax-on-dividends  

Final Thoughts

Preparing year-end accounts can be complex, but with a clear checklist and expert support, UK limited companies can meet their legal obligations smoothly and on time. Filing Accounts offers affordable, hassle-free accounting and tax filing services designed to simplify your year-end process and help your business thrive.

Contact us today to learn how we can assist with your year-end accounts filing in London, Hounslow, Feltham, Richmond, and beyond.