One of the many benefits of setting up a limited company is the option to pay yourself dividends on top of your director’s salary. Dividend tax rates are based on Income Tax bands, but they’re significantly lower than the corresponding rates of Income Tax. You’ll also enjoy a tax-free dividend allowance of £1,000 for the year.
These measures are intended to counter the Corporation Tax already paid on company profits before dividends are issued to shareholders.
Whilst the potential tax savings from dividends are not as great as they were a few years ago, running a limited company is still more tax-efficient than operating as a sole trader if you plan and arrange your remuneration carefully.
So, let’s take a look at the current dividend tax rates for the 2023/24 tax year and the amount of personal tax you will pay as a limited company director and shareholder.
Dividend tax rates for the 2023/24 tax year
Dividend tax rates change at the start of every tax year. They are based on Income Tax bands and thresholds, so the amount of dividend tax you pay depends on your total taxable income from all sources.
You won’t pay any dividend tax on income within your annual Personal Allowance, which is currently £12,570. The first £1,000 of dividend income in the year will also be tax free. This means that you can earn up to £13,570 before you have to start paying tax.
For the 2023/24 tax year, which runs from 6 April 2023 to 5 April 2024, the following rates of dividend tax apply:
- Basic rate tax band: 8.75% – (taxable income between £12,570-£50,270)
- Higher rate tax band: 33.75% – (taxable income between £50,271-£125,140
- Additional rate tax band: 39.35% – (taxable income above £125,140)
To work out your tax band, simply add your annual dividend income to your other sources of income (e.g. director’s salary, expenses). Depending on your total taxable income for the year, you may pay divided tax at more than one rate.
Let’s take a look at a few limited company remuneration examples to understand how dividend tax works.
Example 1:
You receive a total annual income of £13,570. This is made up of £12,570 salary + £1,000 dividends.
- You are a basic-rate taxpayer.
- You won’t pay any dividend tax, on account of the £1,000 divided allowance
- You won’t pay any Income Tax on your salary because it’s within your tax-free Personal Allowance (PA)
- You will not be liable to employee Class 1 National Insurance contributions (NIC) on your salary does not exceed the NIC primary threshold (£12,570)
- The company will pay 13.8% employer’s Class 1 NIC on your salary above £9,100 per year (NIC secondary threshold) = £478.86
- Total deductions on this income = £478.86
Example 2:
You receive a total annual income of £13,570. This is made up of £9,100 salary + £4,470 dividends.
- You are a basic rate taxpayer.
- You won’t pay any Income Tax on your salary because it’s within your PA
- You will not pay employee Class 1 NIC on your salary because it’s below the primary threshold
- The company won’t pay employer’s Class 1 NIC on your salary because it’s below the secondary threshold
- Your first £1,000 of dividends will be tax free, and the remaining £3,470 of dividends will be covered by your PA
- Total deductions on this income = £0.00
Example 3:
You receive a total annual income of £50,000. This is made up of £9,100 salary + £40,900 dividends:
- You are a basic rate taxpayer
- You won’t pay any Income Tax on your salary because it’s within your PA
- You will not pay any National Insurance on your salary because it’s below the primary threshold
- The company won’t pay employer’s NIC on your salary because it’s below the secondary threshold
- £4,470 of dividends will be tax free on account of the £1,000 dividend allowance and your remaining PA
- You will pay 8.75% dividend tax on the remaining £36,430 of dividend income = £3,187.62
- Total deductions on this income = £3,187.62
Example 4:
You receive a total annual income of £80,000. This is made up of £9,100 salary + £70,900 dividends:
- You are a higher rate taxpayer
- You won’t pay any Income Tax on your salary
- You will not pay any National Insurance on your salary
- The company won’t pay employer’s NIC on your salary
- £4,470 of dividends will be tax free on account of the £1,000 dividend allowance and your remaining PA
- You will pay 8.75% dividend tax on £36,700 of dividends = £3,211.25
- You will pay 33.75% dividend tax on the remaining £29,730 of dividends = £10,033.87
- Total deductions on this income = £13,157.63
Is dividend income covered by my Personal Allowance?
Yes, some or all of your dividend income will be covered by your Personal Allowance if your salary is below £12,570.
For example, if you take dividends of £13,570 in the 2023/24 tax year and don’t have any income from other sources, you won’t pay any personal tax or NIC on this dividend income.
The first £1,000 will be covered by the tax-free dividend allowance, and the remaining £12,570 will be covered by your Personal Allowance.
Dividend tax on shares in ISAs and pensions
Dividends from shares held in an ISA are tax free under and have no impact on your dividend allowance. This means that you can save £20,000 of dividend income in stocks and shares ISAs during the 2023/24 tax year. Moreover, any profits generated from investments in your stocks and shares ISAs are free of Capital Gains Tax.
Dividend income received in a pension fund is also tax free whilst the funds remain in the pension. When this income is withdrawn, the dividends will be taxed in line with the pension withdrawal rules that exist at that time.
