Dividend Tax
How dividends are taxed in the UK, the £500 allowance, and why salary-vs-dividend extraction matters for company directors.
Dividend Tax
Dividends — payments made from a company's profits to its shareholders — have their own tax rates and allowances, separate from employment income.
Dividend Allowance
For 2024-25, the first £500 of dividend income is tax-free regardless of your Income Tax band. This was £1,000 in 2023-24 and £2,000 in 2022-23, so the trend is clearly downward.
Dividend Tax Rates (2024-25)
| Income Tax band | Rate on dividends above the £500 allowance |
|---|---|
| Basic rate (up to £50,270) | 8.75% |
| Higher rate (£50,271 – £125,140) | 33.75% |
| Additional rate (over £125,140) | 39.35% |
Dividends sit on top of your other income when calculating which band applies. So if your salary takes you to £45,000, only the first £5,270 of dividends falls within the basic-rate band.
Worked Example — Director Taking Dividends
Ben is the sole director of a limited company. He pays himself a salary of £12,570 (the Personal Allowance) to preserve his State Pension qualifying year without triggering Income Tax or employee NIC. He then takes £40,000 in dividends.
| Slice | Band | Tax |
|---|---|---|
| First £500 | Dividend allowance | £0 |
| Next £37,200 (£50,270 − £12,570 − £500) | Basic rate 8.75% | £3,255 |
| Remaining £2,300 | Higher rate 33.75% | £776 |
| Total dividend tax | £4,031 |
If Ben had taken the same £40,000 as salary instead, the combined Income Tax and National Insurance (employee + employer) would be significantly higher — typically over £14,000. This is why salary-plus-dividend extraction is so common for owner-directors.
Salary vs. Dividend — The Trade-Offs
| Factor | Salary | Dividend |
|---|---|---|
| Corporation Tax saving | Yes (deductible expense) | No (paid from post-tax profits) |
| National Insurance | Employee NIC + employer NIC | None |
| Income Tax rate | 20% / 40% / 45% | 8.75% / 33.75% / 39.35% |
| Pension contributions auto-enrolment | Yes | No |
| Mortgage applications | Preferred by lenders | Some lenders discount dividends |
The optimal mix depends on your total income, whether you have employees, and your pension strategy. Many accountants recommend a salary at the NIC secondary threshold (£9,100 in 2024-25) or at the Personal Allowance (£12,570), with the rest as dividends.
Dividends Inside an ISA or Pension
Dividends received on shares held inside an ISA or pension (SIPP/workplace) are completely tax-free. This is one of the strongest arguments for holding dividend-paying shares inside a tax wrapper rather than a general investment account.
Key Planning Points
- Use the £500 allowance. If you only receive small dividends (e.g. from a few shares), you may owe nothing.
- Combine with ISA. Move dividend-heavy holdings into your Stocks & Shares ISA to eliminate dividend tax entirely.
- Time your dividends. If you control the company, you can vote dividends in the tax year where your other income is lowest.
- Joint shareholding. Transferring shares to a spouse in a lower tax band can reduce the family's overall dividend tax bill.
This is educational content, not financial advice. Dividend strategies for company directors should be discussed with an accountant.
Explain Like I'm 5
If you own a little piece of a sweetshop, sometimes the shop shares its profits with you — that is called a dividend. The first £500 you get is free to keep, but after that you have to give some to the government. If you run your own sweetshop, it is cheaper to take the money as dividends than as wages, because wages have extra charges on top. And if you keep your sweetshop shares in a special savings box called an ISA, you keep every penny!
Key Takeaways
- The dividend allowance for 2024-25 is just £500 — down from £2,000 two years ago.
- Rates are 8.75% (basic), 33.75% (higher), and 39.35% (additional).
- Salary-plus-dividend extraction is tax-efficient for company directors but comes with trade-offs around NIC and pensions.
- Dividends inside an ISA or pension are completely tax-free.
Educational only - not financial advice