Dividend Tax: Thresholds and Rates (2024/25)

Dividends are taxed differently from salary or savings interest. They benefit from a separate tax-free allowance and distinct rates for basic, higher, and additional-rate taxpayers. Here’s how the system works — and how dividends interact with your PAYE income.

1) The 2024/25 Dividend Allowance

The dividend allowance is the amount of dividend income you can receive tax-free each tax year. For 2024/25, it’s £500 — down from £1,000 in 2023/24 and £2,000 in 2022/23.

This allowance applies on top of your Personal Allowance (£12,570 for most people). Dividends that fall within either allowance are tax-free.

2) Dividend Tax Rates (2024/25)

Remember, these apply after PAYE income, pensions, or other taxable income have already used up parts of your Personal Allowance and tax bands.

3) How Dividends Stack with Other Income

Dividends are always taxed last — they sit on top of your other income when HMRC works out your total taxable income.

• First, your salary or pension income uses up your Personal Allowance and basic rate band.
• Then, dividends fill whatever bands remain, applying the dividend tax rates shown above.

4) Worked Example (Director-Shareholder)

Assume you draw a small director’s salary of £12,570 and £35,000 in dividends:

• Personal Allowance (£12,570) covers your salary.
• First £500 of dividends = tax-free (dividend allowance).
• Remaining £34,500 taxed at 8.75% (basic rate band still available).

Total dividend tax ≈ £3,018.75

If you instead took £60,000 in dividends, £500 would still be tax-free, but most of the rest would fall into the higher-rate 33.75% band — adding roughly £19,875 in dividend tax.

5) Allowances and Planning Tips

• Use both your Personal Allowance and Dividend Allowance fully each year.
• Married couples can spread shares between spouses to use both sets of allowances and lower tax bands.
• Consider ISAs: Dividends within an ISA are completely tax-free.
• Corporation tax on company profits comes before dividends — personal dividend tax is a second layer on top.

6) Key Interaction with PAYE

If you’re both an employee and a shareholder (e.g. in your own limited company), HMRC’s self-assessment process combines your PAYE data with dividend income. PAYE usually covers your salary tax, but dividend tax is paid via self-assessment by 31 January after the tax year ends.

7) Dividend vs Salary: Which Is More Tax-Efficient?

Dividends are often more efficient for limited-company directors because they aren’t subject to NI and attract lower rates. However, they don’t count toward pension contributions or benefits like maternity pay. The right mix depends on your income, business structure, and goals.

8) Future Outlook

The government has reduced the dividend allowance each year since 2022, signalling that future increases are unlikely soon. Investors and directors should plan assuming the £500 limit will persist.

9) Summary Table

Use our Take-Home Pay Calculator to see how salary and dividends combine, or plan ahead for next year’s self-assessment bill.