Dividend Tax Rates 2024/25: Everything You Need to Know

Investors and businessmen in the UK are faced with an important consideration of dividend tax. This is because with every new tax year changes in rates and thresholds may affect how much you owe. This is the reason why it is very important to know the present dividend tax rates for the year 2024/25 as this involves planning and maximising return on investment.

What Are Dividends?

Usually understood as portions of, or share in, the profit of an incorporated entity, dividends are paid to its shareholders as in enacting the earn of the ongoing company.If you buy shares of a company, you most probably will be granted dividends stated by the company from time to time, though taxable if they exceed the exempt allowance.

Dividend Tax-Free Allowance for 2024/25

In the 2024/25 tax year, an amendment has been made by the UK government to the dividend allowance. The dividend tax-free allowance was £2000 in the tax year 2022/2023, reduced to £1000 in 2023/2024, and stands at £500 for 2024/2025. This means that only £500 of dividend income is tax-exempt.

The lack of change from previously is not a prevention from the worry that, with the smaller tax-free allowances, more investors will have to bear the excess dividend tax.

Who Pays Dividend Tax?

Also, Dividend tax applies to individuals who receive dividends from:

1. shares in UK companies
2. personal investments in stocks
3. Dividends from shares held in business structures such as limited companies

On the other hand, ISAs (Individual Savings Accounts) do.not. require tax payments on the dividends from  hence are a good way of tax free investment.

How to Reduce Your Dividend Tax Liability

Here are some strategies that you can use to reduce your tax impact: 

1. Utilise ISAs: Invest in dividend-earning stock through ISAs, and your dividends will be tax-free.
2. Income Splits: Transfer shares to a spouse who is in a lower tax band, if it applies, to minimise overall tax exposure.
3. Pension Contributions:They could reduce taxable income and thus the dividend tax rate.
4. Reinvest in Tax-efficient Funds: Invest in tax-efficient income disbursing funds.

Consider Planning Business Dividends Strategically. If you run your own company, balance salary and dividends to improve tax efficiency.

When and How to Pay Dividend Tax

The Self-Assessment Tax Returns assume dividend tax. If your dividends are more than £500, you should notify HM Revenue and Customs about this and also pay any applicable tax by the 31st of January immediately following the end of that tax year.

Those receiving dividends of less than £10,000 can report them using a Simple Assessment or by informing HMRC through a tax code. If dividends exceed £10,000, a full Self-Assessment return will be required.

Personal Tax Allowance

The income tax allowance for England in the fiscal year 2024/25 would still be £12,570 and will remain fixed at this for the entire fiscal year.

Significance:

1. Non-taxable income is that which may be earned up to a certain level.
2. For income greater than £100,000, the allowance is reduced at the rate of £1 for every £2 earned in excess of £100,000. 
3. It is completely removed when income exceeds £125,140.

Declaring Dividend Income to HMRC

HMRC requires dividend income declaration via the Self Assessment Tax Return, where the amount exceeds the £500 tax-free allowance. This free way of informing HMRC is applicable if the dividend income is below £10,000. On the other hand, dividends above £10,000 must be declared with the Self Assessment tax return by the deadline of January 31 after that tax year. Reporting accurately is essential to avoid penalties and the timely payment of tax due.

Tax-Efficient Director’s Salary & Dividend for 24/25

For the 2024/2025 tax year, the budget safeties really seem to have settled on the aspirational figure of £12,570, being the primary earnings on which national insurance is charged.Receive that salary so that you remain under the tax-free Personal Allowances threshold without incurring unnecessary National Insurance contributions. Dividends are the most tax-efficient concerning incomes above this threshold, as they are taxed at lower rates than are salary income. The perfect solution would be combining the salary to this threshold amount together with dividends liable to tax at 8.75 percent for the first income band, 33.75 percent for the second band, and 39.35 percent for the last band. This means less tax for an optimally maximised personal income.

Can I reduce my dividend tax liability

These tax cuts give you numerous accounts in saving dividends tax.

1. Utilise the Tax-Free Dividend Allowance: The dividend allowance for 2024-25 tax years is £1,000, meaning that the first £1,000 of dividends will not be taxed. This is the easiest strategy to save tax from a high income earner.
2. Optimize Salary and Dividend Mix: In other words, by taking a salary just up to the National Insurance primary threshold-“approximately £12,570”-and taking the balance as dividends, one can overall minimize tax exposure; the strategy would keep one right within the lower tax bands for dividends. 
3. Pension Contributions: Contributions to a pension will also reduce taxable income. This, in turn, may place the individual in a lower tax band with possibly lower taxes on dividends. Pension contributions are tax-deductible; therefore, this would act as a reduction on taxes payable by the individual and corporation tax.
4. Split the dividends among family members: If the spouse or family members are shareholders of your company, you can issue dividends to them (up to the available tax-free allowance). This allows for the spreading of the tax liability among lower-rate taxpayers.
5. Invest in Tax-Advantaged Accounts:Most probably, you are mortgaged in investment, and tax efficiency is what comes out as investment-based income in the future. Any dividends earned accrued in an ISA incur no tax.
6. Plan for the Dividend Tax Rates:You need to be aware of how much dividend income pushes you into higher tax bands.  Permits framing of salaries versus dividends, and thus, higher rates of dividend tax (8.75%; 33.75% or 39.35%). 

Taking into account the tax on dividends, availing of taxation ways such as a tax-free dividend allowance along with pension contributions and tax-advantaged investment schemes will enable one to reduce his future tax liabilities on dividends for the period 2024/25.The optimisation of salary-dividend blends will definitely help keep you within the favorable tax bans. If interested in the optimisation of business structures, you can learn more about company formation for non-residents. Check out our Liscard Business Centre for insights: Company Formation for Non-Residents.