The dividend allowance means that you won’t have to pay tax on the first £500 of dividends received in a tax year.
You will pay tax on any dividends you receive over £500 at the following rates:
- 8.75% on dividend income within the basic rate band
- 33.75% on dividend income within the higher rate band
- 39.35% on dividend income within the additional rate band
Please Note: The dividend allowance will not reduce your total income for tax purposes. However, it will mean that you don’t have any tax to pay on the first £500 of dividend income you receive.
Dividends within your allowance will still count towards your basic or higher rate bands and may therefore affect the rate of tax that you pay on dividends you receive in excess of the £500 allowance.
EXAMPLES
Using the rates that will apply for 2024/25:
- Personal Allowance: £12,570
- Basic Rate Limit: £37,700
- Higher Rate Threshold: £50,270
EXAMPLE 1
“I receive a director’s fee of £12,570 and dividend income of £12,000 from my company”
The salary of £12,570 is covered by the personal allowance of the same amount.
This leaves £12,000 taxable. Once we deduct the £500 dividend allowance from dividends, then the residual amount of £11,500 taxable at 8.75% basic dividend rate. You will therefore pay £1006.25 of tax.
EXAMPLE 2
“I receive a director’s fee of £12,570 and receive dividends from my company of £45,000.”
The salary of £12,570 is covered by the personal allowance of the same amount.
The £45,000 is taxable as follows:
£37,700 falls in the basic rate band. After deducting the £500 dividend allowance, £37,200 remains taxable at the basic rate of 8.75%. The excess of £7,300 falls in the higher rate tax band and is taxed at 33.75%. You will therefore pay £5,718.75 of tax.
EXAMPLE 3
“I have a received a salary of £12,570 from my company, £7,000 income from property and receive dividends of £22,000.”
Of the £19,570 non-dividend income:
- £12,570 is covered by the Personal Allowance
- The remaining £7000 to be taxed at Basic Rate
- Of the £22,000 dividend income:
- The Dividend Allowance covers the first £500
- The remaining £21,500
- of dividends to be taxed at the Basic Rate (8.75%)
EXAMPLE 4
I receive a salary of £40,000 and also receive £12,000 in respect of my company dividends.
Of the £40,000 non-dividend income, £12,570 is covered by the Personal Allowance, leaving £27,430 to be taxed at basic rate.
There are £12,000 dividends left to be taxed.
We can offset £500 of the dividend allowance to use up our basic rate band up to £28,430, with £9,770 of dividends being taxed at the basic rate band. The remaining £1,730 is taxed at 33.75% as it falls in the higher rate band.