Important Update to the Dividend Allowance for 2024/25
As a limited company in the UK, you may be well versed in maximising your take-home pay by effectively combining dividends and salary.
However, from 6th April 2024, the annual dividend allowance was halved from £1,000 to £500. This came as disappointing news to limited company owners, no matter their experience in profit distribution. Incorpuk in this blog will help you understand everything about this vital update.
What is a Dividend?
A dividend is a way in which your profits from the company are split among your shareholders.
Dividends are distributed if your business has available profits. Once taxed, it pays all expenses, including corporation tax, VAT, other liabilities, and business expenses.
Many limited company owners operate under the system of ‘drawing down’ a significant portion of the business profits as dividends since it involves less taxation than a high salary. It efficiently compensates the shareholders for their investment in that business.
What is a Dividend Tax Allowance?
The dividend allowance is the total amount of dividends you can receive without incurring tax on them. It was cut to £500 for the year 2024/25. However, dividend payments made using ISA's will continue to be tax-free.
What to Pay if You Exceed the Dividend Allowance
The amount of tax you should pay over the dividend allowance depends on income tax bands.
Add your ordinary salary to your dividend if you want to determine your tax band. The tax on the dividend income depends on the usual UK tax bands, while the rest of the income is based on the Scotland Income Tax rates.
England, Northern Ireland, and Wales income tax and dividend tax rates 2024/25
Scotland income tax and dividend tax rates 2024/25
If you rely on dividends as your source of income, it is only taxable once your payments exceed £13,070 within a given tax year. This amount is the Personal Allowance, the annual earnings tax-free limit, and the £500 dividend allowance.
Since it can be pretty challenging to know what you might be required to pay, here are a few specific examples.
Example 1
Suppose, in the financial year 2024/25, the only income source is the £12,000 dividend income you have earned during that year.
The first £500 of your dividend income is tax-free as part of your annual dividend allowance.
Personal Allowance of £12,570 can offset the rest of £11,500 under UK tax law.
Because all this amount is non-taxable, you can take the entire £12,000.
Example 2
You will receive £25,000 as a dividend for the current year, your only income source.
This £25,000 total puts you in the basic rate tax band (£12,571 – £50,270).
The first £500 is taken as the annual dividend allowance.
The following £12,570 is exempt from tax as part of your Personal Allowance.
This means that £11,930 is taken as the taxable income.
You will be asked to pay an 8.75% dividend tax (the basic rate) on this amount, which is £1,044.
Therefore, your total take-home dividend income for the year equals £23,956.
Can investing in ISA Reduce My Dividend Tax Liability?
Due to the rise in the Dividend Tax Allowance for the 2024/25 financial year, there are a couple of things that you can do to minimise the tax amount payable. One way is to invest in an Individual Savings Account (ISA) or pension, which is not liable to pay dividend tax. The ISA allowance for now is £20,000; thus, utilising this Allowance every financial year makes it possible to reduce the tax liability considerably.
Due to the rise of the Dividend Tax Allowance for the 2024/25 financial year, there are a couple of things that you can do to minimise the tax amount payable. One way is to invest in an ISA or pension that is not liable to pay dividend tax. The ISA allowance is currently £20,000 thus, utilising this Allowance every financial year makes it considerably possible to reduce tax liability.
You may also be able to transfer your spouse’s unused Individual Savings Account allowance into your account, which will take up much of your tax burden. For more information and advice on what you can do, contact an accountant in the UK. Depending on your circumstances, they can educate you on minimising the dividend tax payable by adopting the available techniques.
Do Dividends still have an Advantage even after the Government lowered the Allowance?
Dividends can still be advantageous, even though the government has reduced the Allowance. Despite the tax-free dividend allowance cut, dividends are still one of the most effective ways to get income out of the corporation, especially for individuals in lower tax classes. This interplay between dividends and other tax reliefs, such as Personal Allowances, means they are just as valuable for maximising take-home pay for business owners and shareholders today.
Form Your Company with Incorpuk Today
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Winding Up
The cuts to the dividend allowance for the 2024/25 year include a radical change in the taxation of dividend income. As the Allowance is cut to £500, entrepreneurs might have to rethink their financial strategies. It, therefore, becomes vital to know these changes and how you can plan your taxes in a way that is noble to your desired income, while at the same time making sure you have complied with the new set of rules.