Dividend tax – a guide for the self-employed
3-minute read
Self-employed people who own a limited company might choose to pay themselves in dividends. But what is a dividend exactly?
A dividend is money paid to shareholders out of a business’s profits. Many company owners choose to pay themselves using a combination of both salary and dividend payments. This is because it can be more tax efficient than simply paying yourself through Pay As You Earn (PAYE).
Paying tax on dividends depends on the income tax band you fall into.
What is dividend tax?
If you’re self-employed and own your limited company, you can take money out as a dividend, or you may receive a dividend payment if you own company shares.
You can only do this if your company has made a profit, and the dividends your company pays out can’t be more than its available profits for current and previous financial years.
So if your company doesn’t make a profit but you still need to pay yourself, you’ll need to do this through a salary instead.
Keep in mind that dividends don’t count as a business cost when you’re working out your corporation tax.
And when it comes to dividend tax, it's not paid by your company. It's an income tax that you need to pay yourself, most likely through Self Assessment.
You should seek professional advice from an accountant if you’re wondering about the best way to pay yourself.
How much dividend can I pay myself tax-free?
Each year, you get a tax-free dividend allowance. This means you only pay tax on dividends over that amount. For the 2023/24 tax year, the allowance for tax-free dividend has been reduced to £1,000 (from the previous £2,000). This means that any dividend income of £1,000 or less will be tax-free.
What is the dividend tax rate?
The tax you pay on dividend income over this allowance depends on the income tax band you’re in. You can find the current divident tax rates below:
Income tax rate | Dividend tax rate 2023/24 |
|---|---|
Basic rate | 8.75% |
Higher rate | 33.75% |
Additional rate | 39.35% |
You might pay tax at more than one rate, depending on your overall dividend and non-dividend income.
You also need to take your personal allowance into account, which is £12,570 for the 2023/24 tax year. Again, a professional can help you with your calculations.
Read more about self-employed tax changes for 2023/24.
How much tax do I pay on dividends in 2023/24?
Here’s an example of a self-employed person working out their tax liability for the 2023/24 tax year. They earn £12,570 as salary and £60,000 as dividends.
In the 2023/24 tax year:
- £12,570 of salary is tax free, because the personal allowance is £12,570
- £1,000 of dividends is tax free, because the dividend allowance is £1,000
- the next £49,000 is taxed at the dividend basic rate of 8.75 per cent
- the final £10,000 is taxed at the dividend higher rate of 33.75 per cent
Dividend tax changes for the 2024/25 tax year
The amount of dividends that will be tax-free is set to be reduced again for the 2024/25 tax year. From 6 April 2024, it will now be £500.
This means that more of your dividends will be exposed to the basic rate of tax.
How to pay dividend tax
The way you pay tax on dividends depends on how much you earn as dividend income. Self-employed people will likely need to use their Self Assessment tax return.
- if you earn up to £10,000 then you need to tell HMRC using their helpline, or ask them to change your tax code. Or you can use Self Assessment if you already fill one in
- if you earn over £10,000 then you’ll need to put it on your Self Assessment
When do I pay tax on dividends?
If you’re putting it in your Self Assessment, you’ll need to register by 5 October following the tax year you had the income. The deadline for filing your tax return is 31 January.
Paperwork when paying dividends
You should make sure your company follows the legal requirements when paying dividends, even if you’re the only shareholder.
You should hold a directors’ meeting to declare the dividend and keep minutes of the meeting. Make sure you keep the minutes in your records, because if HMRC were to investigate you, they could ask to see them.
You also need to write up a dividend voucher for each dividend your company pays. The voucher needs to show the:
- date
- company name
- names of shareholders being paid a dividend
- dividend amount
Again, be sure to keep good records when it comes to these dividend vouchers.
More guides for small businesses
You should also speak to a professional accountant if you need more information about paying yourself in dividends, or need a dividend tax calculator.
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Written by
Rosanna Parrish
Rosanna Parrish is a Copywriter at Simply Business, specialising in legal and HR content. Trained at London College of Communication, she has been creating content professionally for eight years at publications across the UK and Spain. Starting her career in health insurance, she also worked in education marketing before returning to the insurance world. Rosanna also writes about wellbeing in the workplace. She lives by the sea and does her best writing in coffee shops.
We create this content for general information purposes and it should not be taken as advice. Always take professional advice. Read our full disclaimer
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