What are the Recent Changes to Dividend Tax Rules?

If you are a businessman and running a limited company in the UK, then you must have some stock in the share market that your shareholders buy. The UK government keeps on making changes to taxation rules to keep the influx of tax returns and the well-being of its citizens streamlined. If you are on the lookout for recent changes to dividend tax rules and regulations in the UK imposed by HMRC, then this article is for you.

 

Recent Changes to Dividend Tax Rules and Regulations

A dividend is the amount of profit paid to shareholders of a company after the company has paid the corporation tax. Being an owner of your limited company, a dividend is the most appropriate way of dealing with tax matters.

An important point to note is that the dividend is not counted as a business expense in the UK because it is the profit money left after paying corporation tax; also, a limited company cannot pay a dividend to its shareholders when the amount of profit is not enough after paying corporation tax.

How is a Dividend Issued by a Limited Company?

Before sharing the dividend, the limited company must hold a meeting of its board of directors to declare the dividend amount. The meeting of company directors should be recorded for tax purposes and account reconciliation purposes. Before making dividend payments, the limited company should issue a dividend voucher, which shows the following information:

• Date of dividend payment
• Name of the limited company
• Names of shareholders being paid the dividend
• Amount of the dividend paid
• A copy of this voucher is shared between the shareholders, and one is kept by the limited company for official records.

What is the Tax on Dividends?

In the UK, limited companies don’t need to pay the tax on dividends they give to shareholders; however, the shareholders, on the other hand, must pay the tax based on their personal financial statistics. If the company owner is also an employee in the company, then he doesn’t have to pay the tax on dividends. If, as a company director, you take a higher salary, then you will pay the tax on your national insurance ID and the company ID as well.

What is the Annual Tax-Free UK Dividend Allowance?

The UK government has made some recent changes to dividend tax rules. The annual tax-free UK allowance on dividends for the tax year 2023/2024 was £1000 from dividends; above this amount, you have to pay tax. For the tax year 2024/2025, the tax-free dividend allowance is £500. This allowance amount is other than your personal tax-free allowance of £12,570.

What are the Dividend Tax Rates for the 2024/25 Tax Year?

While filing taxes for a financial year, there is a limited tax-free income; after that, any dividend you receive or any other earnings will come under the tax payable amount. The amount of tax any UK citizen pays depends upon his tax band, also known as the marginal rate. The marginal rate for the tax year 2024/2025 according to recent changes to dividend tax rules is given below:

• Citizens falling in the Basic-rate tax will pay 8.75%
• Citizens falling into higher-rate tax band will pay 33.75%
• Citizens falling in the additional-rate tax band will pay 39.35%

Dividend Tax Thresholds for the 2024/25 Tax Year

The table given below provides details about the dividend tax thresholds for the 2024/2025 tax year. After the threshold value, every citizen has to pay the tax according to his marginal rate set by HMRC.

• The basic dividend rate is 8.75% from £500 to £37,200
• Higher dividend rates is 33.75% from £37,201 to £125,140
• The additional dividend rates is 39.35% from £125,140 +

Check if you need to Tell HMRC

If the dividends you receive are over the allowed income allowance in your personal account and in your company account, then you must inform HMRC before filing the tax return.

How to Report Tax on Dividends?

Every businessman or individual dealing with stocks must keep HMRC updated with their current dividend income status. If you are a self-employed shareholder, then you must assess your income, the due tax amount, and file it before the deadline.

Report Tax on Dividend Income Up to £10,000

You must inform HMRC about your tax return on dividend income up to £10,000 by

• Requesting HMRC to update your tax code. Meanwhile, the tax will be deducted from your salary or pension.
• Contacting the helpline for assistance.
• Adding the amount to your tax return file
• Report tax on dividend income over £10,000
• If your dividend income is over £10,000, then you will need to file the tax return and pay the due tax amount before the deadline to avoid penalties defined by HMRC.

 

The Bottom Line

A dividend is a profit given to shareholders by the limited company after the clearance of corporation tax. The UK government has defined three bands for taxpayers depending on their annual income. The dividend amount over a certain limit is not under the tax allowance according to recent changes to dividend tax rules.

Disclaimer: All the information provided in this article on recent changes to dividend tax rules, including all the texts and graphics, is general in nature. It does not intend to disregard any of the professional advice.