Taking on a director role brings new challenges, not least of which is understanding dividend tax. This guide simplifies the key aspects, providing clear, actionable advice. Dive into the fundamentals of dividend taxes and learn how to make informed decisions that benefit both you and your business. Ideal for any director ready to tackle their financial responsibilities with confidence.
Profit, plan & prosperWhen a company is established in the UK, it is required to issue at least one share, though there is no upper limit on the number of shares it can offer. These shares may come in various classes, each with distinct rights and privileges, such as voting rights at shareholder meetings and different entitlements to dividends. Typically, dividends are distributed at the financial year’s end, based on the profits earned. The company’s board of directors decides the proportion of profits allocated to dividends, and these are then disbursed to shareholders eligible for dividend payments.
In public limited companies, the dividend amount is not directly linked to the share’s market price, which can fluctuate independently of dividend distributions. Shares that consistently offer substantial dividends tend to be more attractive to investors. It is common practice for companies, both large and small, to incorporate shares into remuneration packages for directors and staff. Smaller enterprises often use dividends as a method to distribute profits among directors and employees.
If you receive dividend income, it’s crucial to include this in your self-assessment tax return, as taxes are not automatically withheld from these payments. Proper accounting for dividend income ensures compliance and helps in managing your financial obligations effectively.
Dividend rates are based on your income tax rate. In the 24/25 tax year, these will be:
| Income Tax Band | Dividend tax rate | Income tax rate |
| Basic rate | 8.75% | 20% |
| Higher rate | 33.75% | 40% |
| Additional rate | 39.35% | 45% |
There are a couple of things to note:
We’ve got a guide on investment planning that could help you
If you earn less than £500 in dividends, you don’t need to take any immediate action, as you’re under the personal allowance threshold. However, it’s essential to inform HMRC of your dividend income. They can then adjust your tax code or deduct the tax directly from your salary or pension. In some cases, HMRC may recommend completing a self-assessment tax form, especially if you have other sources of income or complex financial affairs. This could be a good opportunity to consider hiring an accountant if you haven’t already done so.
While self-assessment forms may appear straightforward initially, incorporating dividends into your tax strategy can present complexities. Seeking professional advice from an accountant or financial adviser can provide invaluable guidance in navigating these intricacies.
Getting an understanding of your whole unique financial planning picture, including income, savings, investments, and other assets, allows you to develop a comprehensive plan tailored to your individual circumstances. This holistic approach to financial planning is what we specialize in at Unividual. As part of your business planning team, we work closely with our clients to create customized strategies that align with their goals and priorities.
The first thing to know is that your taxes are ‘stacked’. Your income from work and pensions and property is placed first, then your capital gains, then savings income and then lastly your dividend income. This means that dividend income, rather than salary income, will be taxed at the higher rates if you straddle two bands. As tax on dividends is lower than income tax at the same band, that can sometimes allow you to be more tax-efficient.
If someone had a salary of £45,000 and an additional £9,000 was paid from dividends, your calculations would look like this:
Employment income, counted first,
Dividend income, counted last,
£35,120 will also be taxed under the 13.25% class 1 NIC: £4,653.40. Of course, your own personal situation may be full of factors that will influence your tax bill and so it’s important to be totally clear on the whole picture of your finances. We’ve got a tax guide that you may find helpful.
Navigating the complexities of dividend taxation and self-assessment can be daunting, especially for those new to being a director or with significant financial responsibilities. Understanding recent changes in tax regulations is crucial. We have a great example on this. As of April 6, 2023, the threshold for filing a self-assessment tax return shifted from £100,000 to £150,000. Additionally, high earners who solely receive PAYE income and have no other income streams are now exempt from filing tax returns from the 2024/25 tax year onwards. Did you know about this? It was kept under the radar and these changes highlight the evolving nature of tax laws and the importance of staying informed. A financial adviser can provide crucial guidance, ensuring compliance with current regulations and strategic planning to optimise your tax position. Whether it’s maximising tax-free allowances, understanding the impact of dividend income on your overall tax rate, or effectively planning for future financial stability, you need an accountant and a financial adviser who can work as a team to offer you tailored advice that can lead to substantial financial benefits.
By engaging with a financial adviser, you can confidently manage your financial affairs, reduce potential tax liabilities, and ensure that your investments and earnings are aligned with your long-term financial goals. If this is something you are interested in finding out more about, have a look at some of our case studies and what the benefits of financial advice really are, other than just being better off financially! Then when you are ready get in touch with us for a free first meeting, we can share a cup of tea or coffee together, in a space you feel at your most comfortable, and find out more about eachother.
Author: Cherie-Anne Baxter
Date Written: 29th April 2024
Updated: 29th April 2024
Approver: Quilter Financial Limited 1st May 2024
Risk Warnings
The Financial Conduct Authority do not regulate tax planning and some employee benefits.
The value of investments and the income they produce can fall as well as rise. You may get back less than you invested.
The figures or %s in this article are for the 2024/25 tax year and are correct on the day the article was published.
