The dividend allowance is the amount of dividend income you can receive each tax year before paying any tax on it. In 2024/25, the dividend allowance is £500.
This allowance has fallen significantly in recent years. It was £5,000 in 2017/18, dropped to £2,000 in 2018/19, and was cut again to £1,000 in 2023/24 before falling to £500 in 2024/25. Understanding how it works and how to use it effectively matters more than ever for limited company directors who pay themselves through dividends.
How the Dividend Allowance Works
The dividend allowance is not an exemption from tax in the way the personal allowance works. It is a nil-rate band: dividend income within the allowance is taxed at 0%, but it still counts toward your total income and affects which tax band the rest of your dividend income falls into.
Here is how the 2024/25 dividend allowance works in practice:
| Dividend Income | Tax Rate | Notes |
| First £500 | 0% | Dividend allowance — no tax regardless of income level |
| Above £500 up to £50,270 total income | 8.75% | Basic rate dividend tax |
| £50,271 to £125,140 total income | 33.75% | Higher rate dividend tax |
| Above £125,140 total income | 39.35% | Additional rate dividend tax |
Total income means all your income for the year added together: salary, rental income, savings interest, and dividends. Your personal allowance (£12,570) is applied first, then the dividend allowance, then dividends are taxed at the appropriate rate based on which band they fall into.
Worked Example: Director Taking Salary and Dividends
A limited company director with no other income takes a salary of £12,570 and dividends of £37,430 in 2024/25, drawing a total of £50,000 from the company.
| Income Component | Amount | Tax Treatment |
| Director salary | £12,570 | Covered by personal allowance — no Income Tax |
| First £500 of dividends | £500 | Covered by dividend allowance — 0% tax |
| Remaining dividends | £36,930 | Basic rate dividend tax at 8.75% = £3,231 |
| Total personal tax owed | Approximately £3,231 (plus small employer NI on salary) |
Compare this to the same £50,000 taken entirely as salary. Income Tax alone would be approximately £7,486 on the portion above the personal allowance, plus National Insurance. The salary and dividend combination saves over £4,000 in personal tax at this income level.
Does the Dividend Allowance Apply to Everyone?
Yes. The £500 dividend allowance applies to all UK taxpayers regardless of whether they are a limited company director, an investor holding shares, or someone receiving dividends from a pension investment. Every individual gets the same allowance.
However, the allowance only applies to dividend income. It does not apply to salary, rental income, or interest. It is specifically for dividends received from UK and overseas company shares.
Dividends and the Personal Allowance: How They Interact
Your personal allowance (£12,570 in 2024/25) is applied to your non-dividend income first. If your salary uses the full personal allowance, dividends are then assessed starting from zero against the dividend allowance and the relevant tax bands.
If your total income from all sources exceeds £100,000, your personal allowance is tapered. You lose £1 of personal allowance for every £2 of income above £100,000. Above £125,140, the personal allowance is lost entirely. This creates an effective tax rate of around 60% on income between £100,000 and £125,140, which is worth planning around carefully.
| Planning around the £100,000 threshold If your total income is approaching £100,000, there are legitimate strategies to avoid the personal allowance taper, including making pension contributions or adjusting the timing of dividend payments. An accountant can model the options for your specific income level. |
How Dividend Tax Is Paid
Dividend tax is not deducted at source through PAYE. You pay it through your Self Assessment tax return after the end of the tax year.
As a limited company director receiving dividends, you must file a Self Assessment return each year and declare all dividends received. HMRC calculates the tax owed and you pay it by 31 January following the end of the tax year.
If your total tax liability exceeds £1,000, HMRC also requires payments on account: advance payments toward next year’s bill made in January and July.
Dividends From Multiple Companies
The £500 dividend allowance covers all your dividend income from all sources combined. If you receive dividends from two companies, the allowance is not doubled. You get one £500 allowance per tax year regardless of how many sources of dividend income you have.
Is It Worth Paying Dividends if the Allowance Is Only £500?
Yes, for most limited company directors. Even with a reduced allowance, dividend income is taxed at lower rates than salary. The 8.75% basic rate dividend tax is significantly lower than the 20% Income Tax and National Insurance that would apply to the equivalent salary.
The key is structuring the combination of salary and dividends correctly for your income level. This calculation changes each year as allowances and rates are adjusted, which is why reviewing your pay structure annually with an accountant is worth doing.
Frequently Asked Questions
How much dividend can I take tax-free in 2024/25?
In 2024/25, the dividend allowance is £500. This is the amount of dividend income you can receive at a 0% tax rate. Any dividends above £500 are taxed at 8.75% (basic rate), 33.75% (higher rate), or 39.35% (additional rate) depending on your total income level.
Do I need to declare dividends below £500 on my Self Assessment return?
If your only untaxed income is dividends below £500, you may not need to file a Self Assessment return. However, if you are a limited company director, you are almost certainly required to file a Self Assessment return for other reasons (director’s salary, other income). In that case, all dividends should be declared on the return even if they fall within the allowance.
Has the dividend allowance always been £500?
No. The dividend allowance has been cut significantly in recent years. It was £5,000 from 2016/17 to 2017/18, £2,000 from 2018/19 to 2022/23, £1,000 in 2023/24, and £500 from 2024/25 onwards. The current allowance is the lowest it has ever been.
Can my spouse or partner use their dividend allowance?
Yes. If your spouse or civil partner is also a shareholder in your company, they have their own £500 dividend allowance and their own personal allowance. Issuing shares to a spouse to make use of their allowances and lower tax band can be tax-efficient, but HMRC scrutinises arrangements between connected persons carefully. Take professional advice before restructuring share ownership.
Do I pay National Insurance on dividends?
No. Dividends are not subject to National Insurance contributions, which is one of the key reasons they are more tax-efficient than salary above the personal allowance level.
Structure Your Dividends Correctly With M&B Tax Services
M&B Tax Services helps limited company directors structure their salary and dividend payments tax-efficiently. We prepare Self Assessment returns, advise on the optimal pay structure for your income level, and make sure your dividend paperwork is in order.
We are ICB-regulated accountants based in Rugby. Getting your pay structure reviewed annually costs far less than overpaying tax year after year.
Book a free 30-minute call and we will review your current structure and tell you if there is a more efficient approach.
Joanna Bruty
- On this page