Dividend tax rates: a small business owner’s guide

A dividend is money paid to shareholders out of a business’s profits. And for tax efficiency, many business directors pay themselves through a combination of a salary and dividends.

But dividend tax rates add an extra layer of complexity for small business owners getting to grips with their tax responsibilities. But what are dividends and how does the UK’s dividend tax work? And what can you do to work as tax efficiently as possible? Read on to find the following:

• What is dividend tax?
• How much dividend is tax-free?
• What are the dividend tax rates?
• How much tax do I pay on dividends in 2024/25?
• Dividend tax changes for the 2025/26 tax year
• Example: understanding dividend tax
• How to pay dividends tax
• Paying dividend tax correctly: mistakes to avoid
• Key takeaways: dividend tax
• FAQ: some common questions

What is dividend tax?

Dividend tax is a tax on the money you receive from a company’s profits (dividends) if you own shares in that company.

When a dividend is distributed in a business, it’s in addition to the salary. To make sure that things are fair and there’s no double taxation, dividends are taxed separately to your wage if you run a limited company.

Sole traders don’t pay dividends tax because a business’s profits are considered the owner’s personal income.

When you’re paid a dividend, your dividend allowance is tax-free. Anything you’re paid over that amount is taxed. This is to make sure dividends aren’t used as a way to avoid other taxes.

For example, if you were paid a dividend of £10,000, and the dividend allowance was £8,000, £2,000 would be subject to dividend tax.

How much dividend is tax-free?

For the current tax year, the amount of dividends that are tax-free is £500. Anything over £500 will be taxed at your income tax rate.

Your dividend income (after the £500 dividend allowance) is also a part of your total taxable income which could affect the income tax band you’re in. Keep in mind that dividends don’t count as a business cost when you’re working out your corporation tax, and can’t be considered an expense.

What are the dividend tax rates?

The current dividend tax rates for the 2024/25 tax year are:

• basic rate – 8.75 per cent
• higher rate – 33.75 per cent
• additional rate – 39.35 per cent

But you need to include your dividends income in your total taxable income to know what tax band you’re in. This includes your salary, any self-employment income, interest from savings, and your dividend income (after the £500 allowance is deducted).

And you get a personal allowance (£12,570 for 2024/25) which is the amount of income you don’t pay tax on at all. This is applied before any dividend tax is calculated.

How much tax do I pay on dividends in 2024/25?

The amount of tax you pay on dividends in the UK for the 2024/25 tax year depends on your total taxable income and the tax band you fall into:

• dividend allowance – the first £500 of dividend income is tax-free
• basic rate taxpayers (20 per cent on income) – 8.75 per cent on dividend income above the £500 allowance
• higher rate taxpayers (40 per cent on income) – 33.75 per cent on dividend income above the £500 allowance
• additional rate taxpayers (45 per cent on income) – 39.35 per cent on dividend income above the £500 allowance

Dividend tax changes for the 2025/26 tax year

The tax-free dividend allowance has been cut considerably in the last few years (from £2,000 for the 2022/23 tax year). However, it will stay the same for the 2025/26 tax year.

This means that from April 2025, it will still be £500.

Example: understanding dividend tax

Here’s an example of a self-employed person working out their dividend tax liability for the 2024/25 tax year. They earn £12,570 as salary and £60,000 as dividends. In the 2024/25 tax year:

How to pay dividends tax

The way you’ll pay dividends tax is through your Self Assessment tax return. Here are the three main steps to consider:

• include dividend income – you’ll need to declare your dividend income on your Self Assessment tax return. This is where you’ll specify the total amount of dividends you received and the amount that falls within your tax-free allowance.
• calculate your tax – the Self Assessment system will calculate how much tax you owe on your dividend income based on your tax band and dividend tax rates.
• pay your tax – you’ll then pay the tax you owe online, by bank transfer, or by other methods HMRC accepts

Paying dividend tax correctly: mistakes to avoid

It can be easy to make a mistake when calculating your dividends tax because it adds an extra layer of complexity to your tax responsibilities. Here are some common mistakes to try and avoid:

• not keeping accurate records – having patchy records of how much dividends has been paid out makes it difficult to calculate what you owe
• misunderstanding the dividend allowance – some people don’t realise that the £500 dividend allowance applies to your total dividend income, not per company
• using the wrong tax band – if you miscalculate your total taxable income, you might end up in the wrong tax band for income and dividend tax
• not seeking professional advice – tax is complicated and sometimes it’s worth seeking the advice of accountant

You can also use a dividend tax calculator to help figure out what you owe.

Key takeaways: dividend tax

Now you should know that dividends are money paid to shareholders from your business’s profits and is additional income to your salary.

The two aspects to keep in mind with dividends tax are to add your dividends to your total income and remember your tax-free allowance.

When you’re doing your Self Assessment tax return, add your dividends to your total income to make sure you’re in the correct tax band.

And keep in mind that the first £500 of your dividends are tax-free and it applies after your personal allowance.

FAQ: some common questions

What happens if I don’t declare my dividends tax correctly?

You can face penalties from HMRC for declaring your dividends tax inaccurately. It means your tax return would be over or under-charged which could lead to an HMRC investigation.

Are dividends taxed differently if my business is a limited company?

Yes, your dividends are taxed differently. The key difference is that limited companies pay tax on their profits first, and then the shareholders pay tax on the dividends. While sole traders’ profits are treated as the owner’s income and taxed directly.

Can I reduce my dividend tax by reinvesting in my business?

You can’t directly reduce your dividend tax by reinvesting in your business. Because you’re taking dividends as an individual, they’re subject to your personal income tax rates. But reinvesting into your business can reduce your corporation tax bill because you pay it on profits before any dividends are distributed.

Are there any tax reliefs or exemptions available for dividend tax?

There aren’t any direct tax reliefs or exemptions for dividend tax. The only relief comes from your personal and dividends allowance which are tax-free.

How much tax do you pay on a dividend?

The amount of tax you pay on a dividend depends on your total taxable income and which tax bracket you’re in. You’ll pay tax on any dividends above the £500 allowance.

What is the dividend tax allowance for 2024/25?

The dividend tax allowance for the 2024/25 tax year in the UK is £500. It was reduced from £1,000 in the previous tax year (2023/24).

How much dividend can I pay myself tax-free in 2024?

You can pay yourself up to £500 in dividends tax-free in 2024/25 as this is the current dividend allowance. Any dividend income above this amount will be taxed at your usual income tax rate.

What is the tax rate on dividends in the 2024 Budget?

There weren’t any changes to the dividend tax rate in the 2024 Budgets. The current dividend rates in 2024/25 are the same as 2023/24 – and relate to your income tax rate.