How Much Dividend Is Tax-Free for the 2024/25 Tax Year?

The tax rules for dividends have changed again—and not in your favour.

HMRC has reduced the dividend allowance for the 2024/2025 tax year to just £500 [1], and that means more of your income may now be taxed.

This article will break down how dividend tax works, how dividend tax is calculated, and what to do if you go over the limit. We’ll also explore a few tips to help reduce your tax bill where possible.

Put simply, a dividend is money paid to shareholders when a company makes a profit. If you hold shares in a company, including your own limited company, you can receive dividends as a way to take income.

Unlike a salary, dividends aren’t paid in exchange for work done and don’t come with National Insurance contributions. They are usually paid from profits after Corporation Tax has been deducted and can be distributed monthly, quarterly, or annually, depending on how the company operates.

For many small business owners and directors, dividends are a common and tax-efficient way to take money out of the business.

For the 2024/25 tax year, the first £500 of your dividend income is tax-free. This is known as the dividend allowance, and it’s separate from your personal allowance (which covers all types of income and is currently £12,570).

So even if you’ve already used up your personal allowance on salary or other income, you can still receive £500 in dividends without paying tax.

It’s worth noting that the dividend allowance has been reduced in recent years. Here’s how it’s changed.

As you can see, the allowance has been cut significantly. Therefore, even modest dividend income may now fall within the taxable range, which makes it more important to plan your income wisely.

Dividends are taxed differently from salaries, rental income, or interest. The amount of tax you pay depends on how much income you have in total and which income tax band you fall into.

Let’s say you're a director and shareholder of your own limited company. In the 2024/25 tax year, your sources of income are a salary of £12,000 and dividends of £30,000, giving you a total income of £42,000. Here’s how your tax is calculated. [2]

Step 1: Apply the Personal Allowance

You’re entitled to a £12,570 personal allowance. Your salary of £12,000 uses most of it, leaving £570 to apply to your dividends.

Step 2: Apply the Dividend Allowance

The next £500 of dividends is covered by a tax-free dividend allowance.

So far, you've covered:

• £570 of dividends (with remaining personal allowance)
• £500 of dividends (with dividend allowance)

That means £1,070 of your £30,000 dividend income is tax-free.

Remaining taxable dividends = £30,000 – £1,070 = £28,930

Step 3: Apply the Basic Rate
Since your total income is £42,000, you’re basic rate taxpayers. The remaining £28,930 in dividends is taxed at 8.75%.

Dividend tax due = £28,930 × 8.75% = £2,531.38

If your dividend income is more than £500, you may need to pay tax on the difference. How you report and pay depends on how much dividend income you receive and whether you're already filing a Self Assessment tax return.

There are 2 main methods:

• PAYE Adjustment (Tax Code Change): If your dividend income is £10,000 or less and you don’t usually file a Self Assessment, you can ask HMRC to update your tax code. This means the tax will be collected automatically from your salary or pension—no need to submit a tax return.
• Self Assessment: If your dividend income is over £10,000, or you're a company director, you'll need to report it through a Self Assessment tax return. You’ll declare your total income and pay any tax owed by 31 January following the end of the tax year. [3]

If your Self Assessment tax bill is over £1,000, and less than 80% of your total tax was collected through PAYE or other deductions, HMRC will ask you to make advance payments toward next year’s tax. These are known as payments on account.

You’ll make 2 instalments:

• 31 January – first payment (50% of last year’s tax bill)
• 31 July – second payment (the remaining 50%)

These are based on the assumption that your income next year will be similar.

You can check your Self Assessment statement or online account to see if you need to pay them and how much is due.

Tax planning doesn’t mean tax avoidance. It means making smart decisions within the rules. Here are 3 simple ways to help you pay less tax on your dividends.

If your income changes from year to year, it can help to plan when you take dividends.

For example, you might delay dividend payments to fall into the next tax year—especially if you think you’ll be earning less.

Spreading dividends over two years can help you stay in a lower tax band and avoid higher rates.

If your spouse or civil partner is a shareholder and in a lower tax band, you can share dividends with them. This lets you take advantage of their unused allowances and lower tax rates. You’ll need to ensure share ownership is genuine and documented.

If you invest outside your company, putting those investments in Stocks and Shares ISA means any dividends are completely tax-free.

You also won’t pay capital gains tax if your investments grow in value and you decide to sell them.

Dividends from ISAs don’t count toward your dividend allowance, won’t push you into a higher tax band, and don’t need to be reported to HMRC.

You can invest up to £20,000 per tax year across all your ISAs, and anything you earn inside stays tax-free for as long as the money remains in the account.

With the dividend allowance at just £500, it’s more important than ever to think ahead. A little planning now can help you avoid surprises later and make the most of what you earn.

If you’re unsure how the rules apply to you or want help managing your dividend strategy, it is worth speaking to a tax advisor or accountant.