Best Accountants in Evesham

What are dividends? Dividends are a distribution of limited company profits paid to shareholders after any expenses, taxes and liabilities are paid to reward them for their investment in the business. How are dividends taxed? Dividends are paid gross, with no tax deducted, and everyone is allowed to earn an amount tax free each year. In the 2024/25 tax year, you can receive £500 of dividend income, tax free. Having been reduced from £5,000 to £2,000 in 2017, and reducing again to just £1,000 for the 2023/24 tax year, the dividend allowance of £500 in the 2024/25 tax year is a shadow of what it used to be. The dividend tax rates are: 8.75% for basic rate taxpayers 33.75% for higher rate taxpayers 39.35% for additional rate taxpayers Dividend tax rates are lower than income tax rates. This means that with a tax efficient structuring of your remuneration through a combination of both salary and dividends, you can pay a reduced amount of tax - whilst remaining compliant and keeping more cash in your pocket. Dividends also count towards your annual income and any amount of dividend income falling within your income tax personal allowance is also tax-free. The personal allowance is currently £12,570 and first applies to non-dividend income – i.e. from earnings or pensions. The good news is that dividends are not subject to national insurance, which is why a combination of both salary and dividends can be the most tax efficient form of remuneration as director.