Tax on Dividends

You pay a different rate of tax on dividends paid from shares held in private or public companies which you declare to HMRC on your self-assessment tax return. The current rates are 7.5%, 32.5% and 38.1%.

The Chancellor introduced a new system from 1st April 2016 in attempt to raise money for the exchequer from small business owners. Those that draw a nominal salary and a higher dividend from their companies saw a substantial rise in the tax they pay.

Dividend Tax Rates

These are the current rates of tax paid on dividends in England, Wales, and Northern Ireland. Scotland has different arrangements.

2017/18 Dividend Tax Rates

  • Tax-free amount: £5,000
  • Basic rate taxpayer: 7.5% (£0 to £33,500)
  • Higher rate taxpayer: 32.5% (£33,501 to £150,000)
  • Additional rate: 38.1% (£150,001 and over)

2018/19 Dividend Tax Rates

  • Tax-free amount: £2,000
  • Basic rate taxpayer: 7.5% (£0 to £34,500)
  • Higher rate taxpayer: 32.5% (£34,501 to £150,000)
  • Additional rate: 38.1% (£150,001 and over)

Historical Tax Rates on UK Dividends

Year 2009/10 2010/13 2013/16 2016/18
Basic Rate 10% 10% 10% 10%
Higher Rate 32.5% 32.5% 32.5% 32.5%
Additional Rate n/a 42.5% 37.5% 38.1%

What is a Dividend?

Shareholders may receive dividends from distributable company profits after the payment of corporation tax. The amount declared must be the same per share. Decisions to pay dividends are made by the directors of the company at board meetings. The proposed payments are minuted and subsequently approved by shareholders.

A dividend voucher then gets raised and filed with the dividend dates. The voucher shows the amount you have received and the associated tax credit under the old system.

Calculating Tax Due

The British taxation system is a complex beast, and calculating tax on dividends is no exception. Since 1st April 2016, a new scheme operates with higher rates.

It works in the following manner:

  • You pay no tax on the first £5,000 (£2,000 from 2018) of any dividend no matter the tax rate you pay.
  • If your salary is over your personal allowance, then this gets taken into account within the basic rate.
  • If your salary is above the basic rate threshold, then dividends get taxed at higher rates.
  • The calculations take account of all income you receive during the year.

Dividend Tax Payment Examples

The examples below show a small business trading with various profit and levels of dividends declared. The calculation assumes that the dividend declared is 100% of the profits after the deduction of the salary.

The data shown reflects personal allowances for the year 2017/18.

New Rules 2016/17/18 Example 1 Example 2 Example 3 Example 4 Example 5
Company Profit £100,000 £80,000 £75,000 £60,000 £40,000
Salary £15,000 £40,000 £15,000 £5,000 £5,000
Corporation Tax £16,150 £7,600 £11,400 £10,450 £6,650
Dividend £68,850 £32,400 £15,000 £44,550 £28,350
Basic Rate Tax £1,875 £0 £1,875 £2,137 £1,264
Higher Rate Tax £12,626 £8,905 £6,045 £1,478 £0

Dividend Tax Calculator

Use our free dividend tax calculator spreadsheet to calculate the tax due on your company profits, salary and dividends in just a few steps.

The spreadsheet works for tax years 2016/17, 2017/18 and 2018/19. The formulae are correct at the time of press, and we accept no responsibility for the results generated.

If you're in any doubt, you should seek the advice of an accountant.

You should show all dividend payments received on your personal self-assessment tax return under dividend/ distribution for the total amount received). Further pages show any tax liability due to HMRC.

Dividends and IR35

The IR35 rules introduced are an attempt for HMRC to reclassify some limited company workers under standard PAYE tax conditions.

If the majority of your work is from one company, then it's likely you'll come under the IR35 rules and then taxed under PAYE rules. In this case, you cannot pay dividends from your company. Check Inland Revenue for more information.

The increases in tax rates from recent budget changes could mean that HMRC relaxes the rules as the treasury are receiving more income under the current system.

Tax Advantages

Many single person contractors set up limited companies then pay themselves a minimum wage and tax the rest of their income in the form of dividends. By doing this, they pay less overall tax because there are no National Insurance contributions payable with dividend payments.