Taking dividends from your limited company as part of your director remuneration, alongside a low salary through PAYE, may represent the most tax-efficient way of extracting this money from your business.
The company doesn’t have to pay employer National Insurance Contributions (NICs), and you don’t have to pay employee NICs on dividends, however, you are liable to pay tax on the dividends you take from your company. So how does dividend payment work and how much tax will you need to pay?
The company must have sufficient distributable current year profits, and/or profits retained from previous years, to support dividend payments. These are profits after corporation tax has been paid. Taking dividends where there is insufficient profits to allow for this, is not allowed and this will be known as an unlawful dividend payment.
You also need to verify that the dividend payment is lawful, and you can do this by holding a meeting of directors. Taking minutes of the meeting supports the decision-making process in determining whether the dividend can be legitimately declared, and you also need to make a dividend voucher.
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How much tax do you pay on dividends from your limited company?
The amount of tax you pay on your dividend income – that which exceeds your tax-free allowances - depends on your income tax band.
For the 2022-23 tax year, the dividend tax rates are:
Basic rate: 8.75%
Higher rate: 33.75%
Additional rate: 39.35%
Pay your dividend tax via self-assessment
You may already file a self-assessment tax return as the director of a company, and you should declare your dividend income within it. You record the total income in dividends, whether they’re received from your own company or another company in which you’re a shareholder.
Each individual has a dividend tax-free allowance (for 2022-23 the dividend tax-free allowance is £2,000) as well as a personal tax-free allowance. Once the personal and dividend tax-free thresholds are passed, any further dividends are liable for tax at the above rates.
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The dividend tax rate is lower than the rate of income tax, which is why this method of remuneration is tax-efficient for company directors. Ensuring the dividend you’re declaring is lawful is a key issue, however. Repeatedly taking dividends in excess of the level the company can afford, can soon lead the company to the brink of insolvency.
For more information on dividend taxation, and whether a dividend may be lawful, please get in touch with Real Business Rescue. We offer free, same-day consultations, and operate an extensive network of offices around the county so you’re never far away from professional support.
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