Reduction in the dividend allowance

The dividend allowance has been a tax-friendly feature for UK investors and business owners since 2016, but recent changes mean you’ll need to adjust your tax planning strategies. From 6 April 2024, the allowance has reduced significantly, and understanding this change is crucial if you receive dividend income.

What’s changed with the dividend allowance?

From the 2024/25 tax year onwards, the dividend allowance has fallen from £1,000 to just £500. This means you can now receive £500 of dividend income tax-free each year, rather than the previous £1,000. For those receiving regular dividend income—whether from your own company, shared investments, or trust distributions—this reduction directly impacts your annual tax bill.

The dividend allowance applies across all dividend income you receive, regardless of the source or number of companies paying dividends. If you’re a director who takes dividends from your company alongside salary, or if you receive dividends from multiple investment sources, all of this counts towards your single allowance.

Who’s most affected by the change?

The reduction hits several groups particularly hard. Owner-managers of limited companies who rely on dividends as their primary income will see a noticeable increase in their tax liability. Previously, you could extract £1,000 tax-free; now that figure is £500. If you typically take £12,000 in annual dividends, you’ll now pay income tax on an additional £500.

Higher-rate taxpayers (those earning above £50,270) and additional-rate taxpayers (above £125,140) will find that more of their dividend income falls into taxable bands. Basic-rate taxpayers may be less affected if their overall income remains below the basic-rate threshold, but anyone receiving regular dividend income should review their position.

Investors with diversified portfolios spanning several UK companies or investment trusts are also in the spotlight. The allowance applies to your total dividend income across all sources, so you cannot “stack” allowances for each individual holding.

Planning your dividend income

With a smaller allowance to work with, now’s the time to review your income strategy. If you’re a company director, you might consider the balance between salary and dividends. National Insurance contributions (NICs) on salary are still a cost factor, but the flexibility between salary and dividends has become more valuable as the dividend allowance shrinks.

Some owner-managers have found it beneficial to take a modest salary up to the National Insurance threshold (£12,570 for 2024/25) and supplement income through dividends. This approach remains cost-effective, but the reduced allowance means you’ll pay dividend tax sooner than before.

If you’re in a couple with a spouse or civil partner, both of you have a separate £500 allowance. Married couples with joint investments should consider splitting ownership of dividend-paying assets where possible, so both can utilise their individual allowances. This is a particularly important strategy if one partner has unused personal allowance or basic-rate band capacity.

Self-assessment and record-keeping

All dividend income must be reported through Self Assessment, even amounts within the allowance. HMRC requires you to declare the full amount and let the system calculate the tax position automatically. You’ll need accurate records from dividend statements, investment platforms, and company records if you’re a director.

If you receive dividends from your own company, your accountant should ensure that the company’s dividend payments are properly documented and that corporation tax has been paid first. Dividends must come from profits that have borne corporation tax—this requirement hasn’t changed.

Delaying your Self Assessment return could mean missing the deadline for amendments if you’ve been over-relying on the previous £1,000 allowance. If you’ve already filed a return for the 2024/25 tax year assuming the higher allowance, you can amend it within 12 months of the filing deadline.

Moving forward

The dividend allowance reduction is a reminder that tax-efficient income planning requires regular review. What worked well in previous years may no longer be optimal. If you receive dividend income—whether substantial or modest—a conversation with your accountant about how to structure your income for the most tax-efficient outcome is worthwhile.

The changes are here to stay, so building the lower allowance into your forward planning now will help you avoid any nasty surprises at Self Assessment time.

For tailored advice, contact Severn Accounting — we’re here to help.