Understanding Dividend Income Taxation in Scotland 2024/2025

As we head into the 2024/2025 tax year, it’s crucial to understand how dividend income is taxed in your Self-Assessment Tax return if you're receiving dividends - particularly in Scotland.

Whether you're a sole trader, shareholder, or director of a limited company, knowing how dividends are taxed can help you plan effectively and maximise your income.

In Scotland, dividend income is taxed separately from other income such as salary, wages, or savings interest.

Here's a breakdown of how dividend income is taxed in the 2024/2025 tax year:

1) Dividend Allowance: You have a tax-free dividend allowance of £500. This means you won’t pay any tax on the first £500 of dividend income you receive. It has decreased over the years.

2) Tax Rates: Any dividends above this allowance are taxed at different rates, depending on your overall income:

Basic Rate Taxpayers: 8.75% on dividends.

Higher Rate Taxpayers: 33.75%.

Additional Rate Taxpayers: 39.35%.

Your other income (e.g., salary) determines your overall tax bracket, and dividends are always taxed last.

Band	Taxable income	Tax rate	Dividend Tax Band
Personal Allowance	Up to £12,570	0%	8.75% (First £500 tax free)
Basic rate	£12,571 to £50,270	20%	8.75%
Higher rate	£50,271 to £125,140	40%	33.75%
Additional rate	over £125,140	45%	39.35%

For Example:

Salary Income of £45 000 per year and dividend income of £10 000 per year.

Because the total taxable income is in the higher tax rate, the dividend income of £9500 (£10 000-£500) @ 33.75% = £3206.25.

The importance of everything

It is important to consider the dividend income to be taken from your limited company by considering your total taxable income for the year.

Because you personally need to pay the tax on the dividend income at the end of the tax year, you need to know how much you need to save to cover the bill

Dividend strategies

For those of you running a limited company, there’s a strategic way to use your dividend allowance that doesn’t necessarily involve withdrawing cash from the company.

Even if your company doesn’t have sufficient cash flow right now to physically pay out dividends, you can still declare a dividend and apply it against the amount your company owes you in the Director's Loan Account (you must be both the director and the shareholder).

Ensure that your company declares dividends up to the limit of your dividend allowance (£500 in 2024/2025). Instead of drawing the cash out, the declared dividends are credited to your Director's Loan Account.

This reduces the amount your company owes you, creating a more favourable position when cash flow improves. When your company has sufficient cash flow, it can repay the director’s loan without any further tax implications for you since the dividend was already declared and taxed appropriately.

Legal aspects of dividends

When paying dividends, it’s important to follow the legal requirements under the Companies Act 2006. Dividends cannot simply be paid whenever you like. There are specific guidelines to ensure compliance:

Dividends can only be paid out of profits. This means the company must have sufficient retained earnings or distributable reserves. Directors should check the company’s financial statements to confirm that there are available profits before declaring any dividends.

A formal board meeting should be held where the directors agree to declare a dividend. This should be documented in the board minutes. Once a dividend is declared, a dividend voucher must be issued to each shareholder.

This voucher should include the amount of the dividend and the date of payment. This declared dividend is what will be used in your self-assessment return.

The company must ensure all shareholders receive their declared dividends proportionate to their shareholding unless different classes of shares are in issue.

Understanding how to use dividend allowances effectively and how dividends are taxed in your Self-Assessment return can have a significant impact on your overall tax liability.

If you have a limited company, using dividends to repay the Director's Loan Account is a tax-efficient strategy, particularly during periods of limited cash flow.

Getting it right

Like so many aspects of taxation, getting this right is important, both financially and legally, so if you have any questions, please contact us, we’re here to help you!