Taxation of dividends

Taxation of dividends

What are dividends

Dividends are payments made by a company to its shareholders, typically as a distribution of profits. When you own shares in a company, you essentially own a portion of that company. Dividends are a way for the company to share its profits with its shareholders. If you withdraw money from your company it will usually be either salary or dividends. Withdrawals of money that are not salary and cannot be classified as dividends should usually be treated as a loan and will need to be repaid to the company. 


Profit Distribution

When a company generates profits, it can choose to leave these in the business or distribute them to its shareholders as dividends. The decision to pay dividends is usually based on your income requirements and should be timed to minimise your tax.


Money in the bank 

Money in the bank account does not always mean that a dividend can be distributed. If you obtain a bank loan you may have money in the bank, but you will not necessarily have profits for distribution. If the company owes money to others, such as HMRC, then this will reduce the amount of money available in the bank to distribute as dividends.


Some accounting software will show the estimated reserves available for distribution as dividends, assuming the bookkeeping is correct and up-to-date; if you use FreeAgent, you should see this on the Overview screen. If you are not sure if you can declare a dividend please contact your account manager. If you withdraw an amount as a dividend when there are no reserves to do so this will need to be reallocated as a loan. You can read more about this here.


Tax Implications

If you are a UK resident dividends are subject to taxation. Non-residents should contact their account manager for further advice. The tax rates on dividends vary depending on the individual's total income and tax band.


Dividend Allowance

Everyone in the UK has a tax-free dividend allowance. This means you can earn a certain amount of dividend income each tax year before you have to pay tax on it. This allowance is £1,000 for 2023-24 and falls to £500 in 2024-25.


Basic Rate Taxpayers: If your dividend income falls within the basic rate tax band, you will pay tax at a rate of 8.75% on any dividends above the dividend allowance but within the basic rate band. The basic rate tax band normally applies to income between £12,571 and £50,270.


Higher Rate Taxpayers: If your dividend income pushes you into the higher rate tax band, you will pay tax at a rate of 33.75% on any dividends above the basic rate band but within the higher rate band. The higher rate tax band normally applies to income between £50,271 and £125,140.


Additional Rate Taxpayers: If your dividend income pushes you into the additional rate tax band, you will pay tax at a rate of 39.35% on any dividends above the higher rate band. The additional rate tax band normally applies to income over £125,140.


Dividend income within a stocks and shares ISA or SIPP

Dividends received on investments held within a tax wrapper are not subject to income tax and do not count towards the tax free allowance. They are not reported to HMRC on self-assessment. 


Reporting untaxed income to HMRC

If your dividend income exceeds the dividend allowance, you'll need to report it on your self-assessment tax return. If you have not yet registered for self-assessment before then this will need to be done by 5 October following the end of the tax year.



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