Tax on dividends… a new(ish) personal tax

All but sole trader 2
A new tax - the Dividend Tax

Since 2015-16, if you operate as a limited company, you’ll quite possibly have noticed an additional line of personal tax on your Self Assessment statement.

This is a tax on dividends paid to yourself. And the amount of tax you’ll pay is likely to increase as the government reduces your tax-free personal dividend allowance over the coming years.
So what are dividends, what tax do you pay on them, why has the tax been introduced, and what can you do to ensure you’re keeping as much of your hard-earned income as you can? Read on, gang.

What is this ‘dividend tax’?

Previously a good way to avoid paying too much personal tax was to reduce the amount of profit you declared by paying some of it out as dividends – bonuses on investment essentially. In this way you could – as well as benefitting from your tax-free personal income allowance – extend it in the form of dividends.

Well HMRC got wise to this practice, and to claw back some of that missing tax income, it introduced a tax on dividends a couple of years ago.

How does it affect you?

If you’ve been paying yourself (and/or your partner/shareholders) dividends, well done for being savvy and avoiding having to pay unnecessary tax. If you haven’t been paying yourself dividends, well that’s a shame – but it’s still going to be worth pursuing the dividend route in the future. Either way though, you should be aware of what tax on dividends is – and that it will reduce your take-home money if you pay yourself dividends.

Rates and Thresholds

The below table shows tax-free thresholds (personal allowances) for income and dividends.

So, take a freelancer photographer operating as a limited company earning £40,000 in 2016/7. Let’s call him Craig. Craig would’ve enjoyed £16,000 of tax-free income if he’d paid dividends to himself. And if he’d paid the remainder to himself as dividends too, he’d just have been taxed 7.5% on that. So his tax bill would’ve been £1,800.

Earning the same in 2018/9, he’ll only be able to enjoy £13,850 tax-free, and he’ll end up paying £1,961.25 in tax. Sad face for Craig.

Why are we telling you about this?

As well as preventing you from kicking off on HMRC when you see the additional line on your Self Assessment statement, it’s important to understand taxes and tax breaks so you can plan your finances.

Nobody likes a nasty shock weeks or months after the completion of their tax return – especially as a freelancer or startup. That sinking feeling, then you get all hot and prickly and sweaty… no thank you sir.

So it’s best to know what’s coming…

What can I do to minimise this tax?

Not much, we’re afraid. But, as mentioned earlier, paying yourself and/or your partner/shareholders in dividends is still a good plan for minimising personal tax. The rates are – compared to those on income – relatively low, and there’s that (rapidly diminishing) tax-free allowance to cling on to.

Nominating your personal income allowance as your ‘salary’ and then paying everything over and above that as dividends is the simplest way of framing it. (NB. this assumes you don’t earn more than about £130,000…)

Here’s how paying dividends might compare with not doing it.

Fran’s a freelance graphic designer operating as a limited company, earning £30,000 in 2017/8:

Dividends for the win


Give us a shout to talk about paying dividends and minimising your tax bills.