Dividend Allowance Cut Again for 2024/25
The dividend allowance — which exempts a limited amount of dividend income from tax — has been reduced once more for the 2024/25 tax year, continuing a trend of gradual cuts in recent years.
Although income within the allowance remains free of dividend tax, it still counts towards your income tax bands, potentially pushing more income into the higher or additional rate brackets.
Key Changes for 2024/25
- The dividend allowance is halved from £1,000 to £500.
- This follows the earlier reduction from £2,000 to £1,000 in 2023/24.
| Tax Year | Dividend Allowance |
|---|---|
| 2022/23 | £2,000 |
| 2023/24 | £1,000 |
| 2024/25 | £500 |
This means that only the first £500 of dividend income received in the tax year will be tax-free.
For anyone receiving dividend income above £500, the change will increase their tax bill and may also require them to file a Self Assessment return, even if they have no other reason to do so.
Dividend Tax Rates (Unchanged for 2024/25)
The tax rates applying to dividend income above the allowance remain the same as those introduced in 2022/23:
- 8.75% – Basic rate taxpayers
- 33.75% – Higher rate taxpayers
- 39.35% – Additional rate taxpayers
These rates apply across the UK, including Scotland, as dividend taxation is not a devolved matter.
Impact on Shareholders and Company Owners
This further reduction in the dividend allowance will have the greatest impact on:
- Small business owners and company directors who extract profits through dividends; and
- Investors with share portfolios held outside of tax-advantaged accounts (such as ISAs).
Even relatively modest dividend income will now create a tax liability once the £500 limit is exceeded.
In practice, many individuals who previously fell below the threshold will now need to register for Self Assessment and declare their dividend income to HMRC.
Close Companies and Loans to Participants
The 33.75% dividend upper rate also applies to tax payable by close companies — broadly, companies controlled by five or fewer shareholders — on loans to participators (typically shareholders or directors).
Where a company makes a loan to a participant that is not repaid within nine months of the end of its accounting period, the company must pay a tax charge at 33.75% of the outstanding loan amount.
This ensures consistency between the rate applied to loans to participants and the higher rate of dividend tax.
Tax Planning Opportunities
With the dividend allowance now only £500, investors and company owners should consider alternative, tax-efficient structures for holding income-producing shares.
1. ISAs (Individual Savings Accounts)
Dividends received within an ISA are entirely tax-free and do not count towards the dividend allowance.
The annual ISA investment limit for 2024/25 remains £20,000.
2. Venture Capital Trusts (VCTs)
Dividends from qualifying VCT investments are also tax-free and do not affect the dividend allowance.
These investments can also offer income tax relief on the amount invested, though they carry higher risk and longer holding periods.
3. Timing and Allocation
Where possible, consider:
- Timing dividend payments between tax years to make best use of each year’s allowance; and
- Splitting shareholdings between spouses or civil partners, allowing both individuals to use their separate allowances and lower-rate bands.
Example: Dividend Tax Liability 2024/25
John is a higher rate taxpayer who receives £3,000 in dividends in 2024/25.
- First £500: Tax-free allowance.
- Remaining £2,500 taxed at 33.75% = £843.75.
Under the 2023/24 rules (with a £1,000 allowance), his tax would have been £675, meaning an increase of £168.75 due to the allowance cut.
Why It Matters
While the headline tax rates remain unchanged, the progressive erosion of the dividend allowance has turned what was once a modest administrative issue into a mainstream concern.
When first introduced in 2016/17, the allowance stood at £5,000. Its gradual reduction to £500 by 2024/25 means that most shareholders — including small investors — now face some level of dividend tax liability each year.
How Merranti Can Help
At Merranti Accounting, we help clients manage the tax impact of dividend income and company profit extraction.
We can assist you with:
- Dividend and salary planning for company directors;
- Reviewing the benefits of using ISAs, pensions, or VCTs; and
- Ensuring all dividend income is reported accurately to HMRC.
If you expect to receive dividends exceeding the new £500 allowance, it’s essential to plan ahead and understand the full tax impact.
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