What is a dividend?
When a company shareholder receives a payment from the profits of a company (after Corporation tax and VAT has been deducted), the payment is called a dividend. This is usually the most tax-efficient way of paying yourself from your company’s profits.
Generally, if you’re the director of a company, the best way to pay yourself is through dividends, as well as giving yourself a low salary.
How to correctly issue a dividend
To issue a dividend, a meeting of the directors must be held in order to officially ‘declare’ the dividend. This meeting needs to be kept on record. If you are the sole director of your company, this still applies however you would just need to ensure that you issue the correct paperwork.
A dividend voucher also needs to be issued for each dividend payment made by your company. The voucher must show the following information:
- Company name
- Name of the shareholders being paid a dividend
- Dividend amount
- Date the dividend is due to be paid
A copy of this dividend voucher should be given to all recipients of the dividend and you will also need to keep a copy of the voucher for your company’s records.
Usually, dividends should be distributed to shareholders according to the percentage of shares owned. For example, if you own 75% of the company’s shares, you should receive 75% of each dividend distribution.
Does your company need to pay tax on dividends?
No. Your company will not be required to pay tax on any dividend payments issued – however shareholders may have to pay tax on the dividends they receive themselves, although this is dependent on their personal circumstances through their annual Self Assessment.
A limited company does not need to pay National Insurance Contributions on dividends.
Tax-free dividend allowance and UK Dividend Tax rates
Before you pay any income tax on your dividends, you can earn up to £2000 on dividends in the 2021/22 and 2021/21 tax years income tax free. This £2000 is on top of your Personal Tax-Free Allowance of £12,570 (2021/22 tax year) and £12,500 (2020/21 tax year).
Once you have gone over your personal allowance and tax-free dividend allowance, you will be taxed on any further dividends you receive.
Your tax band defines how much personal tax you pay on your income from dividends, however the rates are much lower than the usual income tax rates – hence why dividends are the preferred choice as they are so tax efficient!
The rates have stayed the same for many years;
- Basic rate taxpayers will pay 7.5% (usual income tax is 20%)
- Higher rate taxpayers will pay 32.5% (usual income tax is 40%)
- Additional rate taxpayers will pay 38.1% (usual income tax is 45%)
If you need help with dividends, get in touch with our experienced team at email@example.com.