Dividends in 2024/25: a limited company director’s guide

If you’re a seasoned limited company contractor you’ll be well-rehearsed in making the most from your take-home pay through the effective use of combining your salary and dividends.

But the field on dividends is levelling, because changes to the dividend allowance from April 6th 2024 will impact all limited company contractors, regardless of their experience at distributing profits.

Dividends: change (to the tax-free allowance) is coming

This change – the tax-free dividend allowance is halving to just £500 – will occur pretty swifty after Spring Budget 2024 on March 6th and who knows; further changes to dividends could be unveiled then.

Without being privy to the contents of chancellor Jeremy Hunt’s ‘Green Book,’ I want to focus here on dividends in 2024/25, in a guide for limited company directors on what we know -- for sure -- right now, writes Dan Mepham, managing director of SG Accounting.

What is a dividend?

A dividend is a distribution of your company’s profits among its shareholder (s).

Dividends can only be paid if your company has available profits, once tax (including corporation tax -- the main rate of which increased from April 6th 2023 to 25% depending on your company’s profits), VAT; other liabilities and business expenses, have been paid.

Most limited company contractors ‘draw down’ a significant proportion of the profits of their company in the form of dividends, because it is more tax-efficient than taking a large salary. It effectively rewards the shareholders for the investment in the company.

When can contractors draw dividends?

You can draw dividends whenever you like providing there is sufficient profits in the company.

When drawing dividends, you should document your decision, and provide all shareholder(s) with a dividend voucher. These steps are needed as an audit trail should you ever be investigated by HMRC -- and will also be required in preparing a personal tax return for shareholders.

What should your contractor salary be for 2024/25?

Your contractor salary can theoretically be whatever you like because if you control the company, then it’s up to you to decide!

But there are considerations when it comes to salary for contractor Personal Service Companies (PSCs).

Salaries are an allowable expense which is entitled to tax relief, and that ultimately reduces your corporation tax bill. Fortunately, if you’re the sole employee of your limited company, the National Minimum Wage Regulations don’t apply, so you can effectively pay yourself the salary amount of your choice.

That said, in terms of setting your precise contractor salary level for 2024/25, you should consider the affordability for your company, and the tax and National Insurance (NI) thresholds.

It is also worth considering the minimum salary level needed in order to qualify for the state pension and childcare support rules.

The tax-free personal allowance for 2024/2025 is £12,570 which unusually remains the same level as the previous three years. If you pay yourself a salary above this limit, the portion above the allowance is subject to income tax.

What are the rates on dividends for 2024/25?

Dividends are not subject to National Insurance but are subject to income tax (albeit at a different rate to salaries), with currently a 0% tax rate for the first £1,000.

But as mentioned at the top, from April 6th 2024, this ‘tax-free’ limit will be reduced to £500.

The rates on dividends for 2024/25 are as follows:

· Personal allowance – up to £12,570 at 0%

· Basic rate – £12,571 - £37,700 at 8.75%

· Higher rate – £37,701 - £125,140 at 33.75%

· Additional rate – £125,141 + at 39.35%

There are both employee and employer NI considerations for limited company directors.

A director will pay Employee National Insurance contributions on their salary. This is 0% below £12,570; 10% between £12,570, and £50,270 then 2% above this.

An employer is also liable to pay Employer NIC, which is 0% on a salary below £9,100 and 13.8% above this. There is an Employment Allowance available to some employers (but not sole-employee companies), with the effect that the first £5,000 of Employer NI is removed.

When are dividends taxed and how much will you have to pay to HMRC?

Dividends become taxable on the date they’re declared as payable.

For example, a dividend declared on October 10th 2023 as payable on April 10th 2024, would be subject to tax in the tax year April 6th 2024 to April 5th 2025.

Let’s take another example. A dividend declared on October 10th 2023 as payable on April 4th 2024, would be subject to tax in the tax year April 6th 2023 to April 5th 2024.

If you’re still unsure, check with your accountant to ensure you’re aware of the tax implications of drawing dividends at specific times throughout the year.

The amount of tax payable to HMRC will depend on which tax band you fall into.

So for example, if you were to take a salary of £12,570 (£1,047.50 a month) and draw dividends up to the higher rate threshold of £50,270, the income tax payable would be £3,211.25 per year (£50,270 minus £12,570 Personal Allowance minus £500 tax free dividend allowance = £37,200 * 8.75% = £3,255). This is an increase of £43.75 compared to the same income levels the year before.

Do dividends still have the edge despite the government reducing the allowance?

Dividends are taxed at a lower rate than salary, so they do continue to form part of a good tax-planning strategy.

It is also important to have bespoke, tailored advice as everyone is different.

There are more things to consider than just tax for most people – for example pension contributions, childcare arrangements, charitable donations, and also how someone’s income levels and split may affect their eligibility for finance or mortgage applications.

What about Spring Budget 2024 and dividends; should limited companies expect changes?

As referred to already, whether there will be dividend changes at Spring Budget 2024 is tough to call.

We are aware there have been a few indications that tax reductions may start to become a bit more affordable, but only very recently there was a warning from the IMF that the UK should reconsider.

Hunt himself said in the last few weeks that there is going to be less scope for tax reductions than at Autumn Statement 2023. This will be disappointing to many small businesses and contractors, as the main tax reduction measures announced at the Autumn Statement were to the benefit of big PLCs, rather than the millions of small businesses in the UK.

It might be famous last words but personally, I don’t foresee any fundamental changes to the income tax and dividend tax rates at Spring Budget. My big hope, though, is that the chancellor unveils a reduction in corporation tax -- to boost business confidence and the economy in the long-term.

If Hunt’s reading this (and he may well be given that he’s a former limited company owner), my assessment as a contractor accountant is that the Conservatives have a lot of work to do, to both secure the contractor sector’s vote and win this year’s general election. The sense from our PSC clients is that every single one of them will be waiting on Hunt’s every word on Wednesday March 6th, as it’s widely acknowledged that a ‘good news’ Budget for the micro-business sector is long overdue.