What are Dividends? Limited Company Dividend Tax UK
When you operate your own limited company, there are two ways you can pay yourself - in the form of salary or dividends. Taking dividends is a popular way of paying yourself because this is usually more tax-efficient than taking a salary.
Want to learn more about dividends? We explore what they are, the dividend tax rate, and much more.
What are dividends?
Dividends are payments made to a company’s shareholder(s). They are a distribution of profits after the deduction of business expenses, corporation tax, etc.
Quite simply, they are an additional (and alternative) way of paying yourself from the profits available in the company.
How do dividends work?
Each year you get a dividend allowance, which is tax-free in addition to your personal allowance. Some limited company shareholders receive a salary from the company, with the remainder of their income taken as a dividend.
They do not attract National Insurance contributions. Company owners don’t need to take all available funds as dividends from their company - they can leave the money within the company and reinvest this or use tax planning (we would advise speaking to an accountant about this).
How do I take dividends out of my company?
The first step you will need to take is to hold a meeting with your company shareholders to vote on and ‘declare’ a dividend payment.
A record of this meeting should be held along with minutes from the meeting, even if you are the sole shareholder of your company. This record should include the date and amount to be issued, the shareholder(s) present, and whether any other business was discussed.
A dividend voucher must also be presented to each shareholder, which outlines the amount paid.
What is a dividend voucher?
A dividend voucher, also known as a dividend declaration, is a way to record who has received a dividend and when. The dividend voucher should include the following:
- Your limited company name
- The name and address of the shareholder
- Total number or percentage of shares owned by the shareholder
- Dividend amount paid
- Date
- Signature of the company director
How do I distribute dividends if there are two or more shareholders?
Dividends will be distributed to shareholders according to the number and class of shares they own.
When and how often can dividends be taken?
Dividends can be paid at any time, providing there are available profits. It’s entirely up to you when and how much you pay, provided sufficient profits are available.
Do I need to be outside IR35 to draw dividends?
Yes, you must be outside IR35 to receive dividend payments (unless you have profits brought forward from a previous year). Please note that drawing a dividend whilst inside IR35 may incur a large tax liability. Always speak to an accountant if you're feeling unsure.
Any income inside IR35 should be taken as salary, but dividends can be drawn from the company whilst working inside IR35 (if the company has the profits available). Learn more in our guide to working inside IR35.
Do I get a dividend allowance?
Each year, you will get a dividend allowance (£2,000 for 2022/23). This means that all taxpayers receive the first £2,000 tax-free, regardless of other income. The dividend allowance is in addition to the Personal Allowance.
What is the dividend tax rate?
The dividend tax rate differs based on how much is taken. Below is a breakdown of the tax rates and thresholds for 2022/23:
TABLE
Salary or dividends: how should I pay myself?
Most contractors find that paying themselves through a combination of salary and dividends is the most tax-efficient way of drawing money from their limited company. Though this will vary depending on your circumstances, it’s worth investigating the possibilities to find a combination that works for you.
There are several options available to you when drawing money from your limited company. Take a look at our guide to paying yourself for more information.
Let's talk
Interested in finding out more? Speak with our team to see how we can work together.
Here's how you can get in touch...
If you're a client, you can speak to your dedicated accountant on: 03330 342 480
