Guide To Dividend Tax for the 2024/25 Season

Dividend tax refers to the tax levied on income received from dividends paid out by companies to shareholders. This tax applies to individuals who own shares in companies and receive dividends as a source of income.

It’s important to differentiate dividend tax from corporate tax, which is paid by companies on their profits – dividend tax in the UK is the responsibility of the shareholders receiving the dividends. The rate of dividend tax varies depending on the taxpayer’s income tax band – basic, higher or additional rate. A tax-free dividend allowance enables individuals to earn a specified amount of dividend income without incurring tax. Any dividends exceeding this allowance must be declared on a self-assessment tax return and are subject to taxation based on the individual’s income tax band. Dividends once came with a tax credit, but this system has been terminated for a while now. Most taxpayers pay dividend tax through self-assessment, necessitating accurate reporting of all dividend income received during the tax year. The implications of dividend tax influence investment decisions, as investors consider the tax implications of dividend-yielding investments when formulating their investment strategies.

Importance for Shareholders and Company Directors

Because of its direct impact on income, investment decisions and financial planning, dividend tax is of significant importance for shareholders and company directors.

Dividend tax affects the net income received from investments, influencing overall financial stability and budgeting for individuals relying on dividends as part of their income stream. Understanding dividend tax rates and allowances is important for informed investment decisions, helping shareholders and directors optimise tax planning strategies and potentially reduce their tax liabilities. Compliance with dividend tax regulations is essential for company directors, particularly those receiving remuneration through dividends, to avoid penalties and interest charges from HMRC. Directors also need to consider the tax implications of dividend declarations on the company’s overall tax position and shareholders’ personal tax liabilities, contributing to effective corporate strategy. By staying informed about dividend tax regulations and changes, shareholders and directors can make tax-efficient decisions aligned with long-term financial goals, such as retirement planning and wealth accumulation.

Dividend Tax Rates for 2024/25

Dividend tax rates in the UK are based on an individual’s income tax band.

The basic rate of dividend tax is set at 8.75%, applicable to individuals whose dividend income falls within the basic income tax band of  £12,571 to £50,270. The higher rate of dividend tax stands at 33.75% for those earning £50,271 and £125,140. The additional rate, which applies to individuals with income above the higher rate threshold, remains at 39.35%.  The tax-free dividend allowance for this tax year is £500, which means shareholders can receive up to this amount in dividends without incurring any tax. This figure is over and above the Personal Tax-Free Allowance of £12,570

Tax-Free Dividend Allowance

Tax-Free Dividend Allowance is an annual allowance that allows individuals to receive a certain amount of dividend income without having to pay tax on it. For the tax year 2024/25, the dividend allowance has been reduced to £500. As previously mentioned, this means that individuals can receive up to £500 in dividends from shares held in companies before any tax is due on that income. The dividend allowance plays an important role in overall tax calculations for shareholders and investors. Any dividends received within this allowance are not included in the individual’s total taxable income, effectively reducing their overall tax liability. Understanding and utilising the Tax-Free Dividend Allowance is important for tax planning purposes because it allows individuals to optimise their income streams and minimise their tax liabilities within legal limits.

A Step-by-step Guide on Calculating Tax on Dividends 

1. Determine total dividend income:

Begin by totalling all the dividend income you received during the tax year from all sources. This includes dividends from shares in UK companies, as well as dividends from foreign companies that qualify for UK tax treatment.

2. Apply the dividend allowance:

Subtract the tax-free dividend allowance from your total dividend income. For the tax year 2024/25, the dividend allowance is £500. If your total dividends are less than or equal to £500, no tax is due on them.

3. Assess your income tax band:

Determine your total taxable income for the year, which includes salary, dividends, and any other taxable income. Identify which income tax band(s) you fall into – basic rate, higher rate, or additional rate.

4. Calculate taxable dividend at each band:

Allocate your taxable dividend income into the appropriate tax bands based on your total taxable income. For example, if your total income falls within the basic rate band, allocate your taxable dividends to this band first before considering higher or additional rate bands.

5. Apply the corresponding dividend tax rate:

Apply the respective dividend tax rate to the taxable dividend amount in each income tax band.

6. Aggregate the tax due:

Sum up the tax calculated for each tax band to arrive at the total dividend tax due for the tax year. This involves multiplying the taxable dividend amounts by their corresponding tax rates and adding the results together.

7. Consider tax credits or reliefs:

If you are eligible for any tax credits or reliefs, such as the dividend tax credit (historically used to offset dividend tax liability but now abolished), deduct these from the total tax due to arrive at the final tax liability.

8. Final tax liability:

The final result after applying any tax credits or reliefs is your total dividend tax liability for the tax year. This amount represents the tax you owe on the dividends you received during the year, and it should be reported and paid through your self-assessment tax return to HMRC.

9. Check for overlaps with other taxes: 

Keep in mind other taxes you may owe and make sure your dividend tax calculation aligns with your overall tax situation

10. Record keeping: 

All calculations and documents should be recorded in detail and kept for reference in case there are queries from HMRC.

How to Pay Your Dividend Tax

1. Firstly, ensure you are registered for self-assessment with HMRC if you haven’t already done so, particularly if you exceed the tax-free dividend allowance.
2. Next, gather all dividend vouchers or statements from companies or funds that paid you dividends during the tax year.
3. Calculate your taxable dividend income by subtracting the dividend allowance from the total dividends received.
4. Complete your self-assessment tax return accurately, reporting all taxable income sources, including dividends, either online or on paper.
5. Specifically report your dividend income and the taxable amount after applying the dividend allowance in the relevant sections of the tax return.
6. Use the applicable dividend tax rates based on your income tax band to calculate the tax owed on your dividends.
7. Submit your self-assessment tax return to HMRC by the deadline (31 January for online returns) and pay any tax owed by the same deadline.
8. Keep records of dividend vouchers, your tax return, and proof of payment for at least six years in case of HMRC queries.
9. Finally, check HMRC correspondence for confirmation of your tax return submission and payment, and review any calculations or statements they provide for accuracy and completeness.

Payment Deadlines

The deadline for payment of dividend tax aligns with the deadlines for self-assessment tax returns. This means that any tax owed on dividends, along with other tax liabilities, must be paid by 31 January following the end of the tax year. This deadline corresponds to the date by which self-assessment tax returns must be submitted online. If you choose to file a paper tax return, the deadline for submission is earlier, on 31 October. Keep in mind that if you make payments on account towards your tax bill, the first instalment is due by 31 January during the tax year, and the second instalment is due by 31 July following the tax year. Any remaining tax owed after payments on account (the balancing payment) is also due by 31 January, along with the first payment on account for the next tax year.

Missing the payment deadline can result in HMRC charging interest from 1 February onwards and potentially imposing late payment penalties. It’s important to keep track of your tax deadlines through your digital tax account and make payments promptly to avoid these additional charges. If you need to make amendments to your tax return that affect your tax bill, you have until 31 January, one year after the original deadline, to make these changes.

How QAccounting Can Help with Dividend Tax

At QAccounting, our team of expert tax practitioners know exactly how to help individuals and businesses navigate complex tax regulations, optimise tax outcomes and ensure compliance with HMRC requirements. Our comprehensive services include tax planning and advice, dividend tax calculation, tax compliance, record-keeping and more. We offer a personalised service to provide you with the proactive support and guidance needed to make your financial management hassle-free.