Earning money through dividends is a smart move, but knowing how much tax youâll pay on them is crucial to keeping that cash flowing. The UK government has shaken things up again for the 2024/25 tax year, so letâs break down exactly what you need to know about dividend taxes.
đ Dividend Allowance Changes
Hereâs the big headline: the Dividend Allowance is shrinking. It’s dropped to ÂŁ500 for the 2024/25 tax year. Thatâs the amount you can earn from dividends without paying any tax on it. Just last year, this was still at ÂŁ1,000, and not long before that, it was ÂŁ2,000. So, if youâre relying on dividend income, these reductions could mean a higher tax bill!
đ The Tax Rates on Dividends Explained
Once youâve crossed that ÂŁ500 threshold, youâll pay tax on your dividends at different rates, depending on your income tax band:
- Basic Rate Taxpayers (20% Income Tax Band): Youâll pay 8.75% on dividends.
- Higher Rate Taxpayers (40% Income Tax Band): Your dividend tax rate jumps to 33.75%.
- Additional Rate Taxpayers (45% Income Tax Band): Brace yourselfâyou’re looking at 39.35% on dividends.
So, if youâre pulling in dividends, those rates can bite into your profits pretty quickly.
đ§ How Do These Rates Compare?
The current rates have been in place since April 2022, when they were bumped up to help fund social care and the NHS. The Dividend Allowance reduction, from ÂŁ2,000 in 2023 to just ÂŁ500 now, is the government’s way of tightening the belt on tax-free income.
âĄď¸ Quick Example
Letâs say you receive ÂŁ2,000 in dividends this year:
- The first ÂŁ500 is tax-free (thanks to your Dividend Allowance).
- If you’re a basic rate taxpayer, youâll pay 8.75% on the remaining ÂŁ1,500.
- That means youâll owe ÂŁ131.25 in tax on your dividends.
đ Top Tip to Minimise Dividend Tax
One way to reduce your dividend tax bill is to make full use of your ISA (Individual Savings Account) allowance. Any dividends earned on investments within an ISA are totally tax-free. Itâs a simple, effective strategy to keep more of your hard-earned money!
Stay Savvy with Dividend Tax Planning
With the Dividend Allowance shrinking, a little planning can go a long way in saving you money. Whether itâs using your ISA wisely or rethinking your salary and dividend mix, nowâs the time to make sure youâre not giving away more to HMRC than you need to.
If you need more details straight from the source, check out the latest government updates here.