💸 Dividends 101: How They Work, Who Gets Them & What You’ll Owe

This week I had a great question land in my inbox — “Lisa, how do dividends actually work?”

It’s a brilliant question, and one I hear a lot, especially from business owners trying to make the most of their income without handing too much over to the taxman (yes please 🙋‍♀️).

So, let’s break it down, nice and easy…

🍰 What is a dividend anyway?

Think of a dividend as your slice of the profit pie 🥧

If you own shares in a limited company (even if it’s your own company), and that company has made a profit, you might be able to take some of that profit out as a dividend.

BUT — and this is important — you can only pay dividends if:

✔️ You’re operating as a limited company
❌ You’re not a sole trader (sorry, dividends aren't an option here!)
✔️ The company has made a profit after paying its Corporation Tax and VAT

Dividends are declared by the company directors — so it’s not just a “grab the cash and go” situation. The directors have to officially agree to release the funds. Think of it like a mini boardroom decision… even if it’s just you and your dog acting as chair 🐶

🧾 How are dividends taxed?

Ah yes, the million-pound question. (Okay, maybe not a million, but it could be a decent chunk!)

Dividends are taxed differently to other types of income, which is why they’re such a handy tool for tax planning. Here’s what you’ll pay in the 2024/25 tax year:

Your Total IncomeTax Rate on Dividends

Up to £12,570 0%

£12,571 – £50,270 8.75%

£50,271 – £125,140 33.75%

Over £125,140 39.35%

So, if you’re taking a modest salary and topping it up with dividends, you could be saving a lot on tax compared to taking the whole lot as salary. 💡

And a few lovely little extras:

• No National Insurance is due on dividends (hooray!)

• The first £500 you receive in dividends is completely tax-free thanks to the Dividend Allowance 🎉

• Dividends from Stocks & Shares ISAs? Also tax-free 🙌

👩‍💼 Should I be using dividends?

If you’re a director and shareholder of your own limited company, and the business is profitable — absolutely consider it!

Dividends can be a really tax-efficient way to extract income from your business without tripping into unnecessary tax bills. But timing and planning are key 🔑

It’s not a one-size-fits-all approach, so it’s always worth chatting with someone who can look at your big picture and make sure you’re set up in the smartest way (yes, that’s a not-so-subtle nod to me… come and say hi! 😉)

✅ In a nutshell...

• Dividends = profit distributions for shareholders of a limited company

• Only paid after tax and must be declared

• Different tax rates apply (and they’re generally lower than salary!)

• No NI, first £500 is tax-free, and ISAs are exempt

If you’re unsure about what you can take, when to take it, or how much to set aside for tax — don’t worry. This is what I help with every single day!

Got questions? Pop me a message or book in a quick chat. Let’s make sure your hard-earned profits are working for you.