Do You Pay Tax on Dividends?

Dividend income is taxed above a £500 allowance. Learn current UK dividend tax rates, how to minimise tax, and what directors must consider.

Dividends are subject to tax in the UK—though they’re taxed separately from your salary or self-employed income and at different rates. If you receive dividend income from shares in a company, including your own limited company, you may owe tax depending on how much you receive and your total income.

This guide breaks down dividend tax rules, tax-free allowances, rates for different bands, how to reduce your tax liability, and what directors need to know when paying themselves via dividends.

What Counts as Dividend Income?

Dividend income includes:

  • Payments from shares you own in public or private companies

  • Dividends from your own limited company if you’re a shareholder

  • Dividends received via funds, investment platforms, or stocks and shares ISAs (unless held in an ISA or pension, which are tax-free)

Only dividends paid from after-tax profits qualify. Interim and final dividends must be formally declared.

Do You Pay Tax on Dividends?

You don’t pay tax on the first £500 of dividend income per year—this is known as the dividend allowance (2024–25).

Above this amount, dividends are taxed based on your income tax band:

  • 8.75% for basic rate taxpayers

  • 33.75% for higher rate taxpayers

  • 39.35% for additional rate taxpayers

Dividends are taxed after all other income (e.g. salary or freelance income) is assessed.

How Much Is the Tax-Free Dividend Allowance?

As of April 2024, the tax-free dividend allowance is £500 per individual.

This is in addition to your personal allowance, which covers your first £12,570 of total income (if you're eligible for the full amount).

If you only receive dividends and your total income is under these thresholds, you won’t pay any tax. If you're above them, tax applies only to the dividend portion over £500.

How to Pay Less Tax on Dividends

There are a few legal ways to reduce the amount of tax you pay on dividend income:

  1. Use your ISA allowance – Dividends from shares held in a Stocks & Shares ISA are completely tax-free.

  2. Share income between spouses – If your partner is in a lower tax band, transferring shares may lower the household tax bill.

  3. Take dividends below the higher rate threshold – Combine salary and dividends strategically to remain in the basic rate bracket.

  4. Split income between multiple shareholders – In small businesses, spreading dividends can reduce overall tax.

Always keep in mind that dividends must be distributed according to shareholdings unless you have different classes of shares.

What Is Better for Directors: Dividends or Salary?

For directors of a limited company, paying yourself a combination of a low salary and dividends is often more tax-efficient than taking salary alone.

  • Salaries attract Income Tax and National Insurance

  • Dividends are taxed at lower rates and don’t incur employer/employee NI

  • Dividends must be paid from profit after corporation tax

A common approach is to pay yourself a salary up to the NI threshold (to maintain contributions) and take additional income as dividends.

However, you can’t pay dividends if there aren’t sufficient retained profits, and you must follow proper accounting rules.

What Are Director Responsibilities When Taking Dividends?

If you're a company director, you must:

  • Ensure there are sufficient post-tax profits to pay dividends

  • Hold a board meeting to declare dividends

  • Issue a dividend voucher

  • Record the dividend properly in the company accounts

  • Ensure dividends are paid proportionally to shareholders (unless different share classes apply)

Paying illegal dividends (without profit) can lead to director liabilities, repayments, or tax penalties.

How Do You Pay Tax on Dividends Received?

If your dividend income is:               

  • Below £500 – No tax due, no reporting needed

  • Above £500 – You may need to declare and pay via:

  1. Self Assessment – Register and submit a tax return if you’re a higher-rate taxpayer or your dividend income exceeds £10,000

  2. Tax code adjustment – For income under £10,000, HMRC may adjust your PAYE code to collect tax through your salary

You’ll need to keep a record of:

  • Dividend vouchers

  • Investment platform statements

  • Payment records and total income figures

Final Thoughts

You pay tax on dividends, but only if your total dividend income exceeds £500 in a tax year. Dividends are taxed at lower rates than employment income, making them attractive for shareholders and company directors.

For business owners, dividends can be a smart way to draw income—but only if the company is profitable and all HMRC rules are followed. Always keep clear records and consider professional advice if you're taking large dividends or want to maximise tax efficiency.