So, you’ve started a business. Or maybe you’ve got some shares. You take a risk, you play it smart and now your company’s turning a profit. You breathe a sigh of relief as you finally pay yourself a dividend. Success, right?
But then a letter from HMRC. A tax bill. Wait, what?
Yes, you read it correctly. The tax on dividends uk system means you’re being taxed on profits that your company has already paid tax on. And no, it’s not a glitch in the matrix. It’s perfectly legal. In fact, it’s designed that way.
Taxed Once for Working. Taxed Again for Winning
Let’s unpack the madness.
Step 1: Your company makes a profit.
Step 2: It pays 25% Corporation Tax.
Step 3: You, the shareholder, receive what’s left as a dividend.
Step 4: You pay again (between 8.75% and 39.35%) depending on how much you’ve earned that year.
All in, that can bring your effective tax rate to well over 50% on money that you technically earned twice — first by building the company, then by owning it.
It’s like being told you’ve won a race, then being asked to run another lap before you can collect your medal.
The “Double Tax” Nobody Talks About
Most people don’t understand it because they haven’t lived it.
If you’re an employee, your payslip shows a clear trade: hours for income. You pay tax once and move on. But if you’re a director, an investor or someone who’s bet on themselves, you suddenly realise the system doesn’t celebrate success, it charges on it.
Now don’t get us wrong. Tax pays for schools, roads and the NHS. We all benefit from it.
But there’s a difference between paying your fair share and feeling like you’re being charged rent for living in your own house.
Is There a Way Around It?
Not really.
Sure, there are strategies like income splitting with a spouse or using pension contributions to reduce your taxable income. Maybe you hold your shares in an ISA or reinvest dividends into new ventures to postpone the tax hit.
But there’s no magic bullet. The tax on dividends landscape is designed to extract its pound of flesh, regardless of how hard you’ve worked to build something of value.
And what’s more, the dividend allowance shrinks every year. What used to be £5,000 is now just £500.
Why It Still Might Be Worth It
So, why do people keep doing it?
Because ownership still matters. Because building a business and paying yourself a dividend still beats being paid by someone else to build theirs. Because once you understand the rules, no matter how frustrating, you can play the game better than most. Also take a look into the hmrc agent services account.
Paying tax on dividends might sting. But it’s a signal that your business is working, that your risk is paying off and that you’re in the rare group of people who own the machine, not just work for it.
