Paying Tax on Limited Company Dividends in 2023/24

When starting a business most people choose to become self-employed by registering as a sole trader or they form an ordinary partnership with others. However, many people who want to be their own boss register a private limited company.

Private limited companies make up about 37% of the total UK business population, while 56% are sole trader businesses and 7% are ordinary partnerships (source: BEIS).

There are pros and cons to each business formation option, with different payment methods and tax rules for each. Directors of small limited companies can take money out of the business in several ways, but a common way for sole company directors with no other employees is to:

• pay just enough wages through the company payroll so that they qualify for state benefits and pension without paying National Insurance contributions
  • with no Income Tax payable on their wages either, because it doesn’t exceed the Personal Allowance (£12,570 per year in 2023/24)
  • with the rest of their income made up of company share dividend payments, which are subject to Income Tax.
• The company must also pay Corporation Tax on its profits (25% in 2023/24)

This can provide a small tax advantage, which means you pay less tax and take home slightly more each month.

A dividend is a payment that a company makes to its shareholders (ie those who own shares in the company). Share dividends are paid out of the company’s profits, whether from that financial year or from profits retained in the company from previous financial years.

A company’s share dividend payments must not exceed its profit from the company’s current financial year or profits retained in the company from previous financial years. If a company is not making a profit and no previous profits are retained in the company, dividend payments are not allowed and they should not be made.    

Find out more about the benefits of paying yourself dividends.

Dividends must be paid to all shareholders (ie everyone with shares in the company), not just a select few or one (unless the company only has a few or one shareholder). Many “one-person-band” limited companies have just one shareholder, who is the company’s managing director, so dividends are only paid to them from available company profits.

To pay a dividend, according to guidance from HMRC, you must “hold a directors’ meeting to ‘declare’ the dividend and keep minutes of the meeting, even if you’re the only director.”

For each dividend payment made, a dividend voucher must be produced, detailing the date, company name, names of the shareholders receiving a dividend and value of the dividend payment. The recipient should also receive a copy of the dividend voucher, while the company should retain a copy within its records.

Need to know! If you can’t prove that money paid to you from a company you run is a share dividend, HMRC can argue that it’s a salary payment and should be taxed accordingly, which can increase your tax bill.

A limited company must pay Corporation Tax on its taxable profits (25% in 2023/24). It does not pay any tax on dividend payments it makes to shareholders.

The first £1,000 of annual dividend payments shareholders receive are tax-free (this is called the “dividend allowance”). If you receive annual dividend payments worth more than £1,000, the amount of tax you pay is determined by your taxable income and which Income Tax band you fall into.

You only pay Income Tax on taxable income that’s above the annual standard Personal Allowance, which is £12,570 a year (more if you claim Marriage Allowance or Blind Person’s Allowance; less if your income is more than £100,000 a year). Your Personal Allowance is the amount of income that you’re allowed to earn before Income Tax is payable. 

• Use our online UK Dividend Tax Calculator tax calculator to find out how much tax you will pay on dividend earnings for the current tax year.
• Find out more about tax changes to dividend rates for tax year 2023 – 24.

You don’t have to tell HMRC if your dividends do not exceed the dividend allowance for the tax year (ie if they’re less than £1,000).

If you receive up to £10,000 in dividends you can: contact the HMRC helpline; declare it in your Self Assessment tax return (SA100), if you already complete and file one each year or register for Self Assessmentif you’re not already registered.

If you receive more than £10,000 in dividends, you’ll need to complete and file a Self Assessment tax return. If you do not usually send a tax return, you must register by 5 October latest following the tax year in which you earned the income, although doing it sooner is recommended.