Do Shareholders Pay Tax on Dividends?

Dividends can be a great way for company shareholders to earn money in a tax-efficient way, but they are still subject to tax – just at a different rate to other types of income.

What are dividends?

Dividends are payments limited companies can make to qualifying shareholders from the profits the company earns. Sole traders, partnerships and LLPs aren’t permitted to make dividend payments, which means only shareholders of a limited company are eligible to receive them.

Paying dividends to your shareholders isn’t a legal requirement, but doing so does have several benefits:

After all, everybody involved in a business is there to (hopefully) earn an income in return for their involvement and hard work. Dividends can be a tax-savvy way to go about this.

One of the reasons why dividends are such a tax-efficient way of taking money from a business is thanks to the low rates at which they’re taxed. They are considerably lower than standard Income Tax rates and are not subject to National Insurance.

Do shareholders have to pay tax on dividends?

Yes, shareholders do have to pay tax on dividend payments made to them. You’ll normally need to submit a Self Assessment tax return to tell HMRC about the dividends you receive, and then pay dividend tax on the income.

Tax allowances for dividends

The good news is that you won’t need to pay tax on any dividend income if your total income for the year falls within your £12,570 Personal Allowance (using 2024/25 and 2025/26 tax year figures). This is the amount you can earn in a year before starting to pay tax on it.

The great news is that there is also a Dividend Allowance. In 2024/25 this tax-free allowance is £500.

Dividend tax rates

The amount of tax a shareholder pays on dividend income is determined by the total income they earn in a tax year.

Add up all your income from the year, and use this to determine which Income Tax band you fall into. You’ll pay dividend tax at the rate which applies to that income tax band, even though these are two different types of tax.

If your dividend income means that you move up to a new tax bracket, you’ll pay the lower tax rate on the part of your dividend income which falls into the first bracket, and then the increased rate on the part of your dividend income which falls into the next bracket.

How much can be taken in dividends?

Technically, there’s no limit to how much can be paid to shareholders in dividends as long as the total amount of dividends is less than the total amount of profits.

This means that dividend payments made to shareholders can fluctuate according to the company’s financial performance. It’s also important to make sure the business retains some of the profits for itself, helping cash flow and growth.

How do I pay tax on dividends?

Unlike a salary that you earn from an employer, dividends aren’t taxed ‘at source’, so a shareholder’s responsibility to report their dividend income to HMRC and pay the necessary tax on it.

Don’t forget, if you don’t normally submit a tax return but need to start, you must to register by 5th October (the one that comes after the end of the tax year that your income relates to).

The tax owed on dividends will normally need to be paid by January following the end of the tax year in which you received the dividend income.

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