How Much Dividend Can I Pay Myself Tax-Free?

Dividends are one of the most tax-efficient ways to take money out of a limited company, but they’re not always completely tax-free. In the UK, you’re entitled to a dividend allowance that lets you receive a certain amount without paying tax. On top of that, you may be able to use your personal tax-free allowance to increase your tax-free income.

This guide covers what dividends are, how much you can take without paying tax, how they’re taxed after the allowance, and what directors need to know when drawing dividends.

What Is a Dividend?

A dividend is a payment made to shareholders from a company’s post-tax profits. If you run your own limited company and you’re a shareholder, you can pay yourself a dividend as long as the company is profitable.

Dividends must be:       

• Paid from retained profits

• Declared through a formal board meeting

• Accompanied by a dividend voucher and proper accounting records

You can’t pay dividends if the company doesn’t have enough profit after corporation tax.

What Is the Tax-Free Dividend Allowance?

As of the 2024/25 tax year, the dividend allowance is £500. This is the amount you can earn in dividends each year without paying any tax, regardless of your income.

This allowance was reduced from £1,000 in 2023/24 and is subject to change in future budgets, so always check current figures on GOV.UK.

Can I Use My Personal Allowance Too?

Yes. Your personal allowance (currently £12,570) applies to your total income, including salary and dividends.

If you have no other income, you could potentially receive:

• £12,570 (personal allowance)

• £500 (dividend allowance)

• Total: £13,070 in tax-free income

However, most directors take a small salary (often around £9,100 to stay below National Insurance thresholds), so only part of the personal allowance is available for dividends.

What Are the Tax Rates on Dividends?

After the £500 allowance and any remaining personal allowance, dividends are taxed at the following rates (2024/25):

• 8.75% for basic rate taxpayers

• 33.75% for higher rate taxpayers

• 39.35% for additional rate taxpayers

Dividends sit on top of your salary or other income when calculating your tax band.

How to Calculate Tax Due on Dividends

Let’s say:

• You take £9,100 salary

• You receive £10,000 in dividends

• The first £3,470 of dividends use your remaining personal allowance

• The next £500 is tax-free under the dividend allowance

• The remaining £6,030 is taxed at 8.75% = £527.63

Your total tax on dividends in this scenario is £527.63.

Will the Dividend Allowance Change in Future?

Possibly. The allowance has already dropped from £5,000 to £1,000 and then to £500. Future changes will depend on government tax policy. Any further reduction would affect small business owners and investors who rely on dividend income.

Always check the current allowance at the start of each tax year.

What Are My Responsibilities When Taking a Dividend?

As a director of a limited company, you must:

• Ensure the company has enough post-tax profit

• Record the dividend in board minutes

• Produce a dividend voucher

• Pay dividends only to shareholders in line with their shareholding (unless different classes of shares exist)

Improperly paid dividends can be deemed illegal and may need to be repaid.

Should I Pay Myself a Salary or Dividend?

For many directors, the most tax-efficient strategy is to:

• Take a low salary (within personal allowance and below NI thresholds)

• Take additional income as dividends (taxed at lower rates and no NI)

This reduces personal tax and National Insurance costs. However, you must still stay compliant with HMRC rules, and you need profits in the company to issue dividends.

Final Thoughts

In 2024/25, you can pay yourself up to £500 in dividends completely tax-free, and more if you haven’t used your personal allowance. Once you exceed those limits, dividend income is taxed at favourable rates, especially compared to salary.

If you run your own company, this structure can offer substantial tax savings, but you need to manage it properly. Always keep detailed records, ensure your company has profits, and speak to an accountant if you’re unsure how much you can pay yourself tax-free.