Dividends are a portion of company profit that is paid to shareholders in exchange for their investment in the business. This is calculated by distributing the company's profits after corporation tax has been applied.
You do not pay tax on any dividend income that falls within your Personal Allowance, i.e., you don’t pay tax until you earn more than £12,570.
In addition, you get a dividend allowance each year. You only pay tax on any dividend income above the dividend allowance. From 6 April 2023, the dividend allowance was reduced to £1,000. This means that you can receive income of up to £1,000 from shares and some equity-based collective investment funds without paying any tax.
Furthermore, from April 6 2024, it is being halved again, going down to £500.
The table below shows the dividend allowance over the past few years.
As dividend tax rates are less than income tax rates, it is a more beneficial form of income. Directors of limited companies can take dividends from their company's profits instead of a salary to decrease their tax liability for a given tax year.
If you are trying to work out tax on your dividends, then this table will help, as the amount of tax you pay on dividends depends on your income tax band.
As the dividend allowance has been reduced significantly, it will impact on Director’s salaries. There may be ways in which we can help you to continue to reduce your tax liabilities, depending on your personal circumstances. We would be happy to discuss this further with you. Contact us by calling 01623 490 120 or email