On April 6, the current dividend tax allowance of £2,000 is being cut down to £1,000. It’s then being halved again on the same date in 2024. Here’s everything you, the small business owner, need to know about this important update.
What is the dividend tax allowance?
Also referred to as the dividend tax-free allowance, the dividend tax allowance is the total amount you can receive in dividends before you must start paying tax on them.
This figure is changing for the 2023/24 financial year:
- The new dividend tax allowance will be £1,000
- This replaces the old dividend tax allowance of £2,000
- The dividend tax allowance is going down (again) to £500 for the 2024/25 financial year
This is a notable drop, especially when you consider that only five years ago the dividend allowance was £5,000.
Dividend payments that are issued through ISAs will stay tax-free.
What you need to pay if you go over the dividend tax allowance
The amount of tax that you need to pay once you have exceeded the dividend allowance is connected to your income tax band.
To ascertain your tax band, you need to take your general income (for example, your regular salary) and add this to your dividend income.
Taxpayers in Scotland pay tax on dividends according to the regular UK tax bands, but Scottish income tax rates apply to all other sources of income.
England, Wales & Northern Ireland tax bands and dividend tax rates 2023/24
| Band | Taxable income | Tax rate | Dividend tax rate |
| Personal Allowance | Anything up to £12,570 | 0% | 0%* |
| Basic | £12,571 to £50,270 | 20% | 8.75% |
| Higher | £50,271 to £150,000 | 40% | 33.75% |
| Additional | More than £150,000 | 45% | 39.35% |
Scottish tax bands and dividend tax rates 2023/24
| Band | Taxable income | Tax rate | Dividend tax rate |
| Personal Allowance | Anything up to £12,570 | 0% | 0%* |
| Starter | £12,571 to £14,732 | 19% | 8.75% |
| Basic | £14,733 to £25,688 | 20% | 8.75% |
| Intermediate | £25,689 to £43,662 | 21% | 8.75% |
| Higher | £43,663 to £50,270 | 42% | 8.75% |
| Higher | £50,271 to £125,140 | 42% | 33.75% |
| Top | £125,141 to £150,000 | 46% | 33.75% |
| Top | More than £150,000 | 46% | 39.35% |
*If a dividend payment is your only form of income, you would not need to pay tax on your dividends until the payment surpasses £13,570. This is the combined total of the personal allowance (the annual amount you can earn before you are required to pay tax) plus the new £1,000 tax dividend allowance.
To give you a better idea of what you may have to pay, let’s take a look at some examples:
Example 1
For the 23/24 financial year, you are set to get a £10,000 dividend payment. This will be your only income for the year.
- The first £1,000 of dividends is covered by the annual dividend allowance
- The remaining £9,000 is within your tax-free personal allowance (£12,570)
- None of this income is taxable, so you can keep the whole £10,000
Example 2
For the 23/24 financial year, you are set to get a £25,000 dividend payment. This will be your only income for the year.
- £25,000 places you in the ‘Basic’ rate taxpayer bracket (£12,571 – £50,270)
- The first £1,000 is covered by the annual dividend allowance
- The next £12,570 is covered by your tax-free personal allowance
- Your taxable income is the remaining £11,430
- You must pay 8.75% dividend tax (the ‘Basic’ rate) on this amount
- Your take-home dividend income for the year is £24,000
Example 3
For the 23/24 financial year, you are set to get a £15,000 dividend payment and a salary of £40,000. Combined, this takes your earnings to £55,000.
- £55,000 places you in the ‘Higher’ rate taxpayer bracket (£50,271 – £150,000)
- The first £1,000 of dividend income is covered by the annual dividend allowance
- £12,570 of salary income is covered by your tax-free personal allowance
- Your taxable income is the remaining £41,430 (£14,000 dividends plus £27,430 salary)
- You pay 20% income tax (the ‘Basic’ rate) and Class 1 National Insurance contributions (NIC) on the remaining £27,430 of salary income
- You pay 8.75% dividend tax (the ‘Basic’ rate) on £9,270 of dividend income
- The remaining £4,730 of dividend income is taxed at 33.75% (the ‘Higher’ rate)
- Your take-home income for the year is £43,816.58
Example 4
You are a Scottish taxpayer. For the 23/24 financial year, you are set to get a £15,000 dividend payment and a salary of £40,000. Your combined income for the year is £55,000.
- Your salary places you in the ‘Intermediate’ tax band for Scottish income tax, but your combined earnings of £55,000 place you in the UK ‘Higher’ rate taxpayer bracket (£50,271 – £150,000) for dividend tax
- The first £1,000 of dividend income is covered by the annual dividend allowance
- £12,570 of salary income is covered by your tax-free personal allowance
- Your taxable income is the remaining £41,430 (£14,000 dividends plus £27,430 salary)
- You will pay Class 1 NIC and the following rates of Scottish income tax on your salary – 19% (the ‘Starter’ rate) between £12,571 and £14,732; 20% (the Scottish ‘Basic’ rate) between £14,733 and £25,688; and 21% (the ‘Intermediate’ rate) between £25,689 and £40,000
- You will pay 8.75% dividend tax (the ‘Basic’ rate) on £9,270 of dividend income
- You will pay 33.75% dividend tax (the ‘Higher’ rate) on the remaining £4,730 of dividend income
- Your take-home income for the year is £43,694.38
About dividends
A company that has a share capital (for example, a private company limited by shares or a public limited company) and is generating enough profit, can reward its qualifying shareholders and investors by issuing them with a cash dividend.
- Dividends should only be paid out when the company is considered to be in a stable condition
- The decision to pay dividends is made by the company director(s)
- The dividends should be paid from a company’s net profits (from the profit and loss account), not from its capital
- How often dividends are paid differs from company to company
Interested in finding out more? Read our dedicated blog: What is a dividend?
Thanks for reading
The government estimates that this reduction will affect 3,235,000 individuals in 2023/24, with the average loss of those affected expected to be £125.
For 2024/25, when the dividend tax allowance goes from £1,000 to £500, the government believes 4,405,000 people will be impacted, with the average loss of anyone affected going up slightly to £155.
We hope you have found this post helpful. Be sure to regularly check our blog for similar posts on the important company updates that you, the small business owner, need to know about.
Please leave a comment if you have any questions.
