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A self-employed guide to dividend tax and the dividend tax rate

3-minute read

A self-employed guide to dividend tax and the dividend tax rate
Simply Business Editorial Team

Simply Business Editorial Team

16 April 2021

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Self-employed people who own a limited company might choose to pay themselves in dividends. Here’s what you need to know about the dividend tax rate.

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.

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All about the UK 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.

Dividend tax rate – do I pay tax on dividends?

Each year, you get a dividend allowance. This means you only pay tax on dividends over that amount. The allowance remains at £2,000 for the 2021-22 tax year.

The tax you pay on dividend income over this allowance depends on the income tax band you’re in:

Income tax rateDividend tax rate
Basic rate7.5 per cent
Higher rate32.5 per cent
Additional rate38.1 per cent

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 2021-22 tax year (£12,500 for 2020-21). Again, a professional can help you with your calculations.

How much tax do I pay on dividends in 2021-22?

Here’s an example of a self-employed person working out their tax liability for the 2021-22 tax year. They earn £12,570 as salary and £50,000 as dividends.

In the 2021-22 tax year

  • £12,570 of salary is tax free, because the personal allowance is £12,570
  • £2,000 of dividends is tax free, because the dividend allowance is £2,000
  • the next £35,500 is taxed at the dividend basic rate of 7.5 per cent
  • the final £12,500 is taxed at the dividend higher rate of 32.5 per cent

How do I pay tax on dividends from my limited company?

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.

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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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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