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The dividend allowance is a tax relief that allows you to earn a certain amount from dividends each year, tax-free.
A dividend is a payment that’s made to shareholders from a company’s (limited company) profit each year. It can only be calculated once Corporation Tax, VAT etc. has been deducted.
It’s income favoured by many because it’s such a tax-efficient method of taking money from a business. The rate of tax that you pay on dividends is lower than the rate you pay on either your salary or your pension.
Whenever a company creates a dividend, they need to have a meeting with all of the directors to “declare” it and then a voucher is produced with the following information:
Any earnings above the allowance are liable to be taxed at the below rates:
Annual salary | Tax bracket | Tax rate |
Up to £12,570 | Personal allowance | 0% |
£12,571 – £50,270 | Basic rate | 8.75% |
£50,271 – £125,140 | Higher rate | 33.75% |
£125,141+ | Additional rate | 39.35% |
In order to pay tax on your dividends, you’ll need to do a Self Assessment tax return. You can either do this yourself via HMRC online or we can get it sorted for you at TaxScouts.
Or see our Guides, Calculators or Taxopedia