Dividend Allowance 2024/25

Understand how the 2024/25 dividend allowance works, who it affects, and how much tax you’ll pay on dividends over £500

Dividends are a popular way to take income from a limited company or build passive income from shares. But recent cuts to the dividend allowance have reduced how much you can earn tax-free. If you’re a shareholder, company director, or investor, it is essential to understand the 2024/25 dividend tax rules so you can plan effectively, avoid surprises, and maximise your income.

This guide explains how the dividend allowance works, who it affects, what tax you may owe, and how to stay compliant with HMRC rules.

What is the dividend allowance?

The dividend allowance is the amount of dividend income you can receive before paying tax. It applies to all UK taxpayers regardless of total income, although the rate of tax you pay on dividends depends on your income tax band.

For the tax year 2024/25, the dividend allowance is £500. This is a significant drop from previous years:

  • 2022/23: £2,000

  • 2023/24: £1,000

  • 2024/25: £500

This cut means more people will now have to report and pay tax on even modest dividend income.

Who is affected by the dividend allowance change?

The reduced dividend allowance impacts:

  • Limited company directors who pay themselves via a combination of salary and dividends

  • Individual investors who hold shares in UK companies outside ISAs or pensions

  • Business owners who take profits in the form of dividends

  • Spouses of business owners who receive dividend income as part of a tax planning strategy

If you earn more than £500 a year in dividends, you must report this on your Self Assessment tax return and pay the appropriate tax.

How is dividend tax calculated in 2024/25?

The rate of tax you pay on dividend income above the £500 allowance depends on your income tax band.

Dividend tax rates for 2024/25:

  • Basic rate (income up to £50,270): 8.75%

  • Higher rate (income £50,271 to £125,140): 33.75%

  • Additional rate (income over £125,140): 39.35%

Example:
If you receive £3,000 in dividends and have no other income, the first £500 is tax-free. The remaining £2,500 is taxed at 8.75%, resulting in a tax bill of £218.75.

Where do dividends sit in your tax calculation?

Dividends are taxed after other income such as salary or self-employment earnings. They are added to the top of your income stack, which may push you into a higher tax band. This is especially important for directors using both salary and dividends as part of their income strategy.

Reporting dividend income

If your total dividend income exceeds £500, or if your other income is over the Personal Allowance (£12,570), you must declare dividends on your Self Assessment tax return.

You do not need to report dividends if:

  • Your total dividends are less than £500

  • Your total income (including dividends) is below your Personal Allowance

  • Your dividends are received inside a tax-free wrapper such as a stocks and shares ISA or SIPP

Pros and cons of dividend income

Pros:

  • Lower tax rates than salary

  • Flexible timing and control over withdrawals

  • No National Insurance contributions on dividends

  • Efficient for limited company directors when structured correctly

Cons:

  • The allowance is now very low at just £500

  • Requires accurate record-keeping and tax returns

  • May push you into higher tax bands

  • Dividend income is not guaranteed like a salary

Tax planning tips for 2024/25

If you are regularly taking dividends or investing in shares, consider these strategies:

  • Use your ISA allowance (£20,000 per person) to shield dividend income from tax

  • Spread share ownership with your spouse or civil partner to use both allowances

  • Time dividend payments efficiently to avoid crossing into a higher tax band

  • Keep salary low to maximise your basic rate tax band for dividends

  • Reinvest in pension schemes which offer tax relief and avoid dividend tax

  • Speak to an accountant about efficient profit extraction methods for your company

Real-world example

Sarah runs a small limited company and takes a £9,100 salary plus £20,000 in dividends. Her Personal Allowance covers her salary. The first £500 of her dividends are tax-free under the dividend allowance. The remaining £19,500 is taxed at 8.75%, resulting in a £1,706.25 tax bill. She must report this income via Self Assessment.

Alternatives to dividend income

If you want to limit tax exposure, consider:

  • Paying more into pensions for long-term tax-free growth

  • Using tax-efficient investments like ISAs

  • Paying yourself through salary, though this carries National Insurance implications

  • Retaining profits in your company if you do not need them immediately

Important rules to remember

  • Dividends must be formally declared via company minutes

  • Payments must come from post-tax profits

  • You cannot pay dividends if your company has no retained earnings

  • All dividend income must be reported if it pushes your total income above the Personal Allowance

Final thoughts

The dividend allowance has shrunk to just £500 for the 2024/25 tax year, and more taxpayers than ever are likely to feel the pinch. Whether you are an investor or a company director, this change makes tax planning more important than ever. Be sure to use all available allowances, consider efficient structures for income, and report dividends properly to HMRC.

By planning ahead and using professional advice where needed, you can minimise tax on your dividend income while staying fully compliant.