Dividend Tax Calculator

Dividends are paid from a company's post-tax profit and taxed personally at lower rates than salary. Everyone gets a £500 dividend allowance (taxed at 0%). Above that, dividends are taxed at 8.75% (basic rate), 33.75% (higher rate) and 39.35% (additional rate), depending on where they sit on top of your other income. Crucially, no National Insurance is due on dividends, a key reason directors favour them.

A common approach is a salary around the £12,570 personal allowance, enough to use the allowance and count as a qualifying year for the State Pension, while keeping NI low, topped up with dividends. The salary is a deductible company expense (reducing Corporation Tax), and dividends avoid NI. The optimal split depends on profit levels and Corporation Tax, so model both sides.

Dividends can only be paid from retained profit, paying more than the company has made is an illegal dividend. You should record a board minute and issue a dividend voucher for each payment. Dividends are reported on your Self Assessment return, and the tax is due by 31 January. Taking dividends faster than profit allows, or mislabelling loans as dividends, can cause tax and legal problems.

• Paying dividends from insufficient profit. Only retained post-tax profit can be distributed, illegal dividends can be reclaimed and taxed.
• Forgetting Corporation Tax. The company pays 19 to 25% before any dividend. Judge efficiency on combined tax, not the dividend rate alone.
• Ignoring the shrinking allowance. The dividend allowance is just £500 now, far smaller than a few years ago, so more is taxable.
• No paperwork. Without board minutes and vouchers, HMRC can challenge the payments. Keep records.