9 July 2025
Table of contents
Table of contents
Dividends can be a great way for company shareholders to earn money in a tax-efficient way or as a reward for investment. Although they tend to be more efficient than taking income out the company in another way, they are still subject to tax – just at a different rate to other types of income. In this article we explain how shareholders declare dividend income and pay tax on it, and how much.
Dividends are payments limited companies can make to qualifying shareholders from the profits the company earns. Sole traders, partnerships and LLPs aren’t permitted to make dividend payments, which means only shareholders of a limited company are eligible to receive them.
Paying dividends to your shareholders isn’t a legal requirement, but doing so does have several benefits:
After all, everybody involved in a business is there to (hopefully) earn an income in return for their involvement and hard work. Dividends can be a tax-savvy way to go about this.
One of the reasons why dividends are such a tax-efficient way of taking money from a business is thanks to the low rates at which they’re taxed. They are considerably lower than standard Income Tax rates and are not subject to National Insurance.
Yes, shareholders do have to pay tax on dividend payments made to them. There’s no escaping HMRC! You’ll normally need to submit a Self Assessment tax return to tell HMRC about the dividends you receive, and then pay dividend tax on the income.
The good news is that you won’t need to pay tax on any dividend income if your total income for the year falls within your £12,570 Personal Allowance (using 2024/25 and 2025/26 tax year figures). This is the amount you can earn in a year before starting to pay tax on it.
The great news is that there is also a Dividend Allowance. In 2024/25 and 2025/26 this tax-free allowance is £500. You can even add the two allowances together.
So, if the only income you get in a year is a dividend of £13,070 – you won’t be paying tax or NI on it. Lovely stuff.
The amount of tax a shareholder pays on dividend income is determined by the total income they earn in a tax year.
Add up all your income from the year, and use this to determine which Income Tax band you fall into. You’ll pay dividend tax at the rate which applies to that income tax band, even though these are two different types of tax.
If your dividend income means that you move up to a new tax bracket, you’ll pay the lower tax rate on the part of your dividend income which falls into the first bracket, and then the increased rate on the part of your dividend income which falls into the next bracket.
Basic rate payer
Higher rate payer
Additional rate payer
Taxable Income
£12,571 to £50,270
£50,271 to £125,140
Over £125,140
Dividend Tax Rate
8.75%
33.75%
39.35%
A shareholder receives £2,000 in dividends and earns a salary of £50,000, so their total income for the 2025/26 tax year is £52,000.
Deduct the £12,570 Personal Allowance to leave £39,430.
This means their taxable earnings are £39,430, which puts the taxpayer in the Basic Income tax band of 20%.
So, in this scenario, the taxpayer will be liable for:
Technically, there’s no limit to how much can be paid to shareholders in dividends as long as the total amount of dividends is less than the total amount of profits.
This means that dividend payments made to shareholders can fluctuate according to the company’s financial performance. They can an also depend on your future plans. The business might have a bumper year, but if you have a cunning plan to upgrade assets/expand/spend the cash/create a nice buffer to help you manage company cash flow, then it’s important to make sure the business retains some of the profits for itself.
Unlike a salary that you earn from an employer, dividends aren’t taxed ‘at source’. It’s a shareholder’s responsibility to report their dividend income to HMRC and pay the necessary tax on it. The way you do this depends:
Don’t forget, if you don’t normally submit a tax return but need to start, you must to register to do this by 5th October. For example, if you need to send a tax return for the 2024 to 2025 tax year, then you’ll need to be registered before 5th October 2025, and have your tax return submitted (and the bill paid!) by 31st January 2026.
Learn more about using Pandle to make business accounting easier. Create an account today and decide what to do with all the extra time you get back.
Serial snacker, compulsive cocktail sipper, and full time wordsmith with a penchant for alliteration, all things marketing, and pineapple on pizza.
Create your account today, and decide what to do with all the extra time you get back. We hear Pilates is popular.
Live chat support
No card details required
Making Tax Digital compliant
