What a dividend actually is
A dividend is a share of company profit paid to shareholders. You can only pay one if the company has enough retained profit after corporation tax to cover it. That is why directors cannot simply take money out and call it a dividend; the profit has to be there, and the paperwork has to exist.
How to work out your dividend tax, step by step
- Add up your dividends for the tax year. Total everything paid to you between 6 April and 5 April.
- Stack them on top of your other income. Dividends are taxed as the top slice, so your salary and other income decide which band the dividends fall into.
- Take off the £500 allowance. The first £500 of dividends is taxed at 0%. It uses up part of your band but costs no tax.
- Apply the right rate. Dividends in the basic rate band are taxed at 8.75%, in the higher rate band at 33.75%, and in the additional rate band at 39.35%.
- Report through Self Assessment. Enter the total on your tax return, and pay the tax by 31 January with the rest of your bill.
A worked example
Tom is a company director. He pays himself a salary of £12,570 to use his personal allowance, then takes £40,000 in dividends. The first £500 of dividends is tax free. The rest sits mostly in the basic rate band at 8.75%, with a slice tipping into higher rate at 33.75% once his total income passes £50,270. Planned this way, his overall tax is far lower than taking the same money as salary, because dividends carry no National Insurance.
Where people get caught out
- Paying dividends with no profit. If the profit is not there, HMRC can treat it as salary or a director's loan, both of which cost more.
- No dividend paperwork. You need a board minute and a dividend voucher for each payment.
- Forgetting the tax lands in January. Dividend tax is not deducted at source, so set money aside for the Self Assessment bill.
- Ignoring the interaction with the £100,000 threshold. Large dividends can strip your personal allowance and push the effective rate up sharply.
The salary and dividend mix is worth getting right
The split between salary and dividends, and the timing, can save a director thousands a year, but only if the profit, paperwork and thresholds line up. TaxTune sets the most efficient mix for your company and handles the returns so it is all correct.
Frequently asked questions
How much dividend can I take tax free?
The dividend allowance means the first £500 of dividends in a tax year is taxed at 0%. On top of that, if your total income is within your personal allowance you may pay no tax on more of it, but the £500 allowance is the dividend specific figure.
What are the dividend tax rates?
Above the £500 allowance, dividends are taxed at 8.75% in the basic rate band, 33.75% in the higher rate band and 39.35% in the additional rate band. The band depends on your total income for the year.
Do I pay National Insurance on dividends?
No. Dividends do not attract National Insurance, which is a large part of why a salary and dividend mix can be more efficient than a full salary for company directors.
How do I report dividend income?
You report dividends on your Self Assessment tax return and pay the tax by 31 January. It is not deducted at source, so the full amount is due with your other tax.
Can I pay a dividend if the company made a loss?
Only if there are retained profits from earlier years to cover it. Dividends must come from profit after corporation tax. Paying one without sufficient reserves is unlawful and can be reclassified by HMRC.
Let us handle your company's tax and your dividends
We prepare your company accounts, set the most efficient salary and dividend mix, produce the dividend paperwork, and file your personal return so the tax is right and paid on time. Fixed fee, and we show you the savings before you commit.