What tax do you pay on dividends?
May 31, 2017
Earlier this year the Government announced its intention to reduce the tax-free dividend allowance from £5,000 per year to £2,000. This would have affected any contractor operating through their own personal service company, a type of limited company. Typically, PSC contractors draw dividends on top of a small salary from their business.
Now, however, the Government has revoked this decision, and the tax-free allowance on dividends remains at £5,000.
How are dividends taxed?
- The amount of tax you pay on dividends depends on which tax band applies to you.
- The tax-free personal allowance for 2017/18 is £11,500.
- Dividends which take your income to the £33,500 basic rate threshold are subject to a 7.5% tax.
- Dividends which take your income into the higher rate tax band (£33,500 – £150,000) are subject to a 32.5% tax and an income of £150,000+ means you pay 38.1% dividend tax.
Income tax bands of taxable income (£ per year)
| Tax year 2016-17 | Tax year 2017-18 | |
| Basic rate | £0-32,000 | £0-33,500 |
| Higher rate | £32,001-150,000 | £33,500-150,000 |
| Additional rate | Over £150,000 | Over £150,000 |
Income tax rates – 2017-18
| Main rates 1 | Tax year 2017-18 |
| Basic rate | 20% |
| Higher rate | 40% |
| Additional rate | 45% |
| Dividend rates 2 | |
| Dividend ordinary rate – for dividends otherwise taxable at the basic rate | 7.5% |
| Dividend upper rate – for dividends otherwise taxable at the higher rate | 32.5% |
| Dividend additional rate – for dividends otherwise taxable at the additional rate | 38.1% |
Source: HM Treasury
What to do next
If you have any questions relating to tax or accountancy, please get in touch. Crest Plus is one of the UK’s oldest specialist contractor accountancy firms, with almost 20 years’ experience in supporting contractors in a range of industries, from construction to healthcare.
You may find the following pages and articles helpful:
Use our contractor calculator to work out your take-home pay.