UK Taxation on Dividends in 2024

There were plenty of positives announced by Chancellor of the Exchequer Jeremy Hunt in the March 2024 Spring Budget with a heavy focus on reducing taxes, including cuts to National Insurance rates. This was of course no surprise bearing in mind that a General Election is edging ever closer and the cost of living crisis continues to linger.

Another key announcement which was not positive, however, was confirmation of a proposed change regarding UK taxation on dividends, specifically a reduction in the dividend allowance. If you’ve been self-employed and operating through your own limited company for a number of years, this will (unfortunately!) be nothing new to you.

In 2018 the dividend allowance was £5,000 and in the 2018/19 tax year it was reduced to £2,000. At the start of the 2023/24 tax year it halved from £2,000 to £1,000 and at the start of the current 2024/25 tax year it halved once again to £500.

The net effect of this is that limited company directors and shareholders will pay tax on £1,500 more dividends than they would have done in the 2022/23 tax year, assuming they receive £2,000 or more in dividends over and above the personal allowance.

This change brings tax optimisation into sharp focus as limited company contractors and freelancers will look to mitigate this change and make sure they are operating as tax-efficiently as possible to maximise their take home pay. Utilising dividends and with an optimal remuneration structure is a key component of achieving that.

In this post we’ll examine the UK taxation on dividends in 2024 now that the Spring Budget is out of the way and we’re in the new tax year. But first, let’s start with the basics and get some definition checks.

What are Dividends?

Dividends are a distribution of limited company profits paid to shareholders after any expenses, taxes and liabilities are paid to reward them for their investment in the business.

What is the Dividend Allowance?

The dividend allowance is the amount of dividends you can receive before they incur any tax and in the 2024/25 tax year any dividends you receive over the £500 dividend allowance that fall outside your personal allowance will be taxed. The tax-free personal allowance is £12,570 so you could receive up to £13,070 in tax-free dividends if you don’t receive any salary or have any other taxable income.

If you receive dividends from an ISA or certain types of pension, they would also usually be tax-free.

Let’s look at the dividend tax rates and bands, and the income tax rates by way of comparison.

What are the Dividend Tax Rates and Bands?

Dividend tax rates are divided into bands in the same way that income tax rates are on your salary. The key difference, however, is that dividend tax rates are lower than income tax rates. This means that with a tax-efficient structuring of your remuneration through a combination of salary and dividends, you can pay a reduced amount of tax whilst remaining compliant and increase your take home pay. The amount of tax you pay against your salary and dividends is determined by which tax band your overall taxable income places you in.

Personal Allowance

  • Taxable Income Up to £12,570
  • Tax Rate 0%

Dividend Allowance

  • Dividend Income Up to £500
  • Tax Rate 0%

Basic Rate Band

  • Taxable Income £12,571 – £50,270
  • Dividend Tax Rate 8.75%
  • Income Tax Rate 20%

Higher Rate Band

  • Taxable Income £50,271 – £125,140
  • Dividend Tax Rate 33.75%
  • Income Tax Rate 40%

Additional Rate Band

  • Taxable Income Over £125,140
  • Dividend Tax Rate 39.35%
  • Income Tax Rate 45%

Use our Salary & Dividend Calculator to test different income scenarios to see how much tax you could save to boost your take home pay.

How Does Paying Yourself Dividends Work?

To be able to withdraw dividends from your business, there must be enough retained profit to do so, otherwise it would technically be a director’s loan which would need to be repaid. If the business is making a loss and has no retained profit then dividends can’t be paid.

The retained (net) profit in the business is turnover minus expenses and Corporation Tax plus any retained profit already in the business. You don’t have to withdraw all retained profit as dividends – some (or all) of it can be retained in the business if, for example, you wanted to use it to invest in equipment.

Dividends can be issued at any time but shareholders and directors will generally do so at regular intervals such as monthly or quarterly. If you are the sole shareholder in the business you can receive 100% of the dividends being paid.

A director’s meeting must be held to declare the dividend and a dividend voucher must be produced to confirm key details including the dividend amount(s), business name and recipient name(s). FreeAgent accounting software will automatically generate and store a record of dividend vouchers and also create board minutes for the dividend. Any tax due on the dividends will then be paid by the recipients (not the company) by way of their annual Self-Assessment Tax Return.

How Gorilla Accounting Can Help

We are expert limited company accountants and when you appoint us you’ll work with your own dedicated accountant who will offer unlimited guidance and support including ensuring your business is operating as tax-efficiently as possible in terms of remuneration, and also reduce the tax you pay on dividends.

They will help to maximise retained profit by ensuring you claim the maximum amount of allowable expenses to reduce your Corporation Tax liability so that you have the highest possible amount of retained profit, and as part of our service we will help you extract dividends from your business as tax-efficiently as possible.

All your business and personal accounting needs will be expertly handled with a same day response to your queries guaranteed, and award-winning FreeAgent cloud accounting software is included as standard at no extra cost in your great value monthly fee.

If you have any queries regarding dividends or our limited company accounting service, our expert accountants are on hand to help. Give us a call today on 0330 024 0406 or request a call back here.

 

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