What tax is payable on limited company dividends?

If you are a limited company shareholder, you will receive income from the company in the form of dividends. So, how are dividends taxed?

What are the dividend tax rates?

There are three rates of dividend tax payable, depending on the tax bands you fall in to.

10% rate on dividends below the £35,000 higher rate threshold (for the 2011/12 tax year).
32.5% on dividend income between the higher rate threshold (£35,000) and the additional rate threshold (£150,000).
42.5% on dividend income above the additional rate threshold of £150,000.

In order to calculate your dividend tax liability, you first need to turn your ‘net’ dividend into a ‘gross’ dividend for tax purposes.

You multiply the net dividend (the amount you actually draw down from your company) by 100/90 to give the gross amount, to take into a account a 10% tax credit which is automatically applied to dividends to compensate for having already paid corporation tax on the company profits.

How much tax do you actually pay?

For any dividend income falling below the £35,000 higher rate threshold, there is zero dividend tax to pay (as the 10% tax credit cancels out the 10% tax rate).
For higher rate dividend income (between £35,000 and £150,000), you pay 25% (the effective rate).
For additional rate income, your effective rate is 36.1%

Further information

You should ask your accountant if you have any questions about the timing or taxation of your company dividends.

You must ensure that you only declare dividends when profits are available to distribute, otherwise HMRC may class them as illegal, and apply additional tax and penalties.