Small Business VAT Registration Threshold Explained
Everything you need to know about the VAT registration threshold after April 2024.
Key Highlights
- Dividends are payments made to shareholders from a company’s profits after accounting for corporation tax.
- As a company director, one of the most tax-efficient ways to pay yourself is by taking a salary up to the Personal Allowance threshold, combined with dividends.
- Dividends benefit from their own tax allowance and are taxed at rates lower than income tax, making them a favourable option for withdrawing profits. They are also treated separately from regular income, with distinct tax rules that can help you maximise your earnings.
What are the UK dividend tax rates 2024-25?
For the 2024/25 tax year, 6 April 2024 until 5 April 2025, the dividend tax rates and thresholds are:
| England, Wales & Northern Ireland tax bands and dividend tax rates 2024/25 | ||
|---|---|---|
| Band | Taxable income | Dividend tax rate |
| Personal Allowance | Up to £12,570 | 0%* |
| Basic | £12,571 to £50,270 | 8.75% |
| Higher | £50,271 to £125,140 | 33.75% |
| Additional | More than £125,140 | 39.35% |
| Scottish income tax rates 2024/25 | ||
|---|---|---|
| Band | Taxable income | Dividend tax rate |
| Personal Allowance | Up to £12,570 | 0%* |
| Starter | £12,571 to £14,876 | 8.75% |
| Basic | £14,877 to £26,561 | 8.75% |
| Intermediate | £26,562 to £43,662 | 8.75% |
| Higher | £43,663 to £50,270 | 8.75% |
| Higher | £50,271 to £75,000 | 33.75% |
| Advanced | £75,001 to £125,140 | 33.75% |
| Top | More than £125,140 | 39.35% |
What is the 2024 dividend allowance?
Dividend allowance is the income from dividends you can earn without paying tax. The dividend allowance for the 2024/25 tax year is £500. This means the first £500 of your dividend income is tax-free. Any dividend income beyond this amount will be taxed at the applicable rate based on your overall income bracket.
For example, if your total dividend income is £5,000, you would first deduct the £500 tax-free allowance, leaving £4,500 to be taxed at the rate corresponding to your total income band (8.75% for basic rate taxpayers, 33.75% for higher rate taxpayers, and 39.35% for additional rate taxpayers).
This allowance helps reduce the tax burden on dividend income, especially for smaller shareholders.
Insight
Suppose dividend payments are your only source of income. In that case, you won’t pay any tax on your dividends until the total exceeds both the personal allowance and the dividend allowance, which amounts to £13,070 for the 2024/25 tax year (£12,570 personal allowance plus £500 dividend allowance). This means you can earn up to £13,070 in dividends without tax.
However, suppose you have another source of income (such as salary or pension). In that case, the personal allowance will be applied to that income first, leaving only the £500 dividend allowance to reduce your taxable dividend income.
What is my personal tax allowance?
The standard Personal Allowance is £12,570. However, it is reduced by £1 for every £2 you earn over £100,000. This means that once your income exceeds £125,140, your Personal Allowance is fully eroded.
Find out more: 2024/2025 Tax Brackets UK: Income Tax Rates and Allowances
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Do I need to pay tax on all my dividends?
No, you only pay tax on dividend income that exceeds the £500 dividend allowance for the 2024/25 tax year. Any dividend income within this £500 allowance is tax-free. Once your dividend income surpasses this threshold, the remaining amount will be taxed according to your income tax band (8.75% for introductory rate, 33.75% for higher rate, and 39.35% for additional rate taxpayers).
How do I know which dividend tax rate applies to me?
The dividend tax rate depends on your overall taxable income. After accounting for your personal allowance and any other income, your total income determines whether you fall into the basic, higher, or additional tax rate band.
- Basic rate 8.75%: Up to £50,270
- Higher rate 33.75%: £50,271 to £125,140
- Additional rate 39.35%: Above £125,140
Illustration
John earns a salary of £63,200 and receives a dividend income worth £7,850. We first need to calculate his total income to determine how much tax he owes on his dividends.
Calculate John’s Total Income:
- Salary: £63,200
- Dividends Received: £7,850
- Total Income: £63,200 + £7,850 = £71,050
Everyone is entitled to a personal allowance, which for John is £12,570.
Apply His Personal Allowance:
- Personal Allowance: £12,570
- Taxable Income: £71,050 – £12,570 = £58,480
Next, we look at which UK tax band John falls into based on his taxable income. The basic rate tax band extends up to £50,270, while the higher rate band applies to income between £50,271 and £125,140. Since John’s taxable income of £58,480 exceeds the basic rate threshold, he is in the higher rate band. This means his dividends will be taxed at a higher rate of 33.75%.
Calculate tax bill on Dividends:
- The first £500 of dividends falls within the tax-free allowance.
- Remaining subject to tax:
- £7,850 – £500 = £7,350
- Total tax to pay on dividends:
- £7,350 x 33.75% = £2,480.6
See also: UK Dividend Tax Calculator
Why is my income tax allowance considered when calculating my dividend tax?
Your Personal Allowance is applied to your total income as tax relief. If your total income exceeds the Personal Allowance, this can reduce or eliminate the allowance for higher earners, impacting how much your income is taxable.
While dividends have their own tax rates and a specific dividend allowance, the total taxable income determines which tax band applies to your dividends. If your combined income pushes you into a higher tax bracket, it can result in a higher tax rate on your dividend income. Therefore, your Personal Allowance affects how much tax you ultimately pay on dividends.
What happens if my dividend income crosses into a higher tax band?
If your dividend income pushes you into a higher tax band, you’ll pay the higher rate on the portion of income that exceeds the threshold. For example, if your total income moves from the basic rate to the higher rate, you’ll pay 33.75% on the dividends above £50,270.
How do I declare my dividend income to HMRC?
For the financial year 2024/25, if your dividend income exceeds £500, you will need to pay tax on it. If your dividend income exceeds £10,000, you must register for a self assessment tax return. You should contact HMRC for guidance if your dividend income is below this threshold.
To inform HMRC, you can:
- Contact the Helpline: Reach out directly for assistance with your specific situation.
- Request a Tax Code Change: If necessary, ask HMRC to adjust your tax code. You must inform HMRC by 5 October following the end of the tax year. This adjustment allows HMRC to modify your PAYE tax code to reflect your expected dividend income, facilitating gradual tax collection from your wages throughout the year.
Are dividends taxed differently from salary income?
Yes, dividend income is taxed differently from salary income at separate rates. Salary is subject to PAYE and National Insurance contributions, while dividends are taxed only after the £500 allowance. Dividend income has its tax rates, and no National Insurance is applied to it.
However, it’s important to note that if you have other sources of income, the total amount will be considered when determining the applicable tax rate for dividends. While only the dividend income is taxed, the combined total income influences the tax rate applied to that income.
Can I reduce my dividend tax liability?
You can reduce your dividend tax liability by keeping your total income within a lower tax band or by utilising available allowances, such as your personal allowance, marriage allowance, or pension contributions. It’s advisable to consult a professional accountant for personalised strategies that suit your financial situation.
How do the dividend tax rates compare to the previous year?
The dividend tax rates for the 2024/25 tax year remain the same as in the 2023/24 tax year: 8.75% (basic), 33.75% (higher), and 39.35% (additional). However, the dividend allowance has been reduced to £500 from the previous £1,000.
Do I pay National Insurance on dividend income?
No, dividend income is not subject to National Insurance contributions. You only pay the applicable dividend tax rate on income exceeding the dividend allowance.
What is the most tax-efficient director’s salary and dividend for 24/25?
For the 2024/25 tax year, the most tax-efficient salary for limited company directors, subject to Class 1 National Insurance contributions, is £12,570, assuming you are entitled to the full Personal Allowance.
This salary is considered tax-efficient, regardless of whether or not you can claim the Employment Allowance, as it keeps earnings below thresholds that trigger higher taxes or NI contributions. Any additional income can be taken as dividends, taxed at lower rates than income tax, making this a more favourable way to draw profits from the company.
See also: What Is the Role and Duties of a Company Director?
Disclaimer: This blog is for informational purposes only and reflects our understanding of the topics discussed. It should not be considered tax advice. Please consult a qualified tax advisor for personalised guidance.
