How much tax do you pay on a dividend?
What is a dividend?
Once a limited company has made a profit, it may pay out that money to its shareholders in the form of a dividend. The profit is the amount of money left over after deducting all business expenses, liabilities, and taxes (such as Corporation Tax and VAT).
Taking a small salary plus dividends from your limited company is often the most tax-efficient way to pay yourself as a director. As a director, you will be paid in the same manner as any other employee. In order to take a salary, you will have to process a payroll and make monthly submissions to HMRC, the same way you would for any other employee.
Keep in mind that dividends cannot be deducted from taxable income and that it is against the law to distribute dividends if the company does not have enough taxable earnings to fund the dividend payment.
What is the process for issuing a dividend?
A dividend must be “declared” at a board meeting before it can be issued. The meeting must be recorded. Even if you are your limited company’s sole director, this still applies; in that instance, it can only be a matter of filing the necessary paperwork.
You must provide a dividend voucher that demonstrates the following for each dividend payment your business makes:
- date the dividend is paid
- company name
- names of the shareholders being paid a dividend
- amount of the dividend.
All recipients of the dividend amount should receive a copy of the voucher, and you should retain a copy for your company’s records.
Generally, dividends should be paid out in accordance with the proportion of shares that each shareholder owns in the business. Therefore, if you hold 50% of the shares in the business, you should get 50% of each dividend payment. In the case of spouses, shares can easily be transferred between shareholders if you need to change the percentage shareholding.
Tax on dividends
Any dividend payments made by your company are tax-exempt but depending on their individual circumstances and their annual self-assessment, shareholders may be required to pay tax on the dividends they receive.
Due to the fact that neither the business nor you as an employee will be required to pay National Insurance Contributions (NICs) on dividends, operating your business as a limited company can be a tax-efficient approach. Check out our article on Benefits of a Limited Company vs Sole Trader here.
The Annual Tax-free Dividend Allowance
In addition to your Personal Tax-Free Allowance of £12,570 in the 2022-23 and 2021-22 tax years, you are able to earn up to £2,000 in dividends without incurring any income tax.
Dividend Tax Rates for the 2022/23 and 2021/22 tax years
Any dividends you receive after you’ve used up your Personal Allowance and the £2,000 tax-free Dividend Allowance are subject to tax.
Your tax band determines how much personal tax you will pay on dividend income. One of the reasons why dividends are particularly tax-efficient for limited company directors is because the tax rates you pay are lower than the income tax rates.
Below are the dividend tax rates for the 2022/23 and 2021/22 tax years:
Dividend Tax thresholds – 2022/23 tax year
|Dividend Tax Rate 2022/23
|Personal Allowance: no tax paid on income in this band.
|£0 – £12,570
|£12,571 – £50,270
|8.75% on dividends earned above dividend allowance.
|£50,271 – £150,000
We hope this guide to dividends has improved your understanding of how to adopt more tax-efficient strategies for your business. Get in touch with us on 020 8850 3300 if you have any questions or need any assistance; our tax experts are here to help you and your business.