Paying yourself Dividends? How are they taxed?

A dividend is a payment made to company shareholders from the profits of a company after Corporation Tax has been accounted for. When operating your business as a limited company, the most tax-efficient way of extracting money from your company is usually via dividends.

It’s important to remember that dividends cannot be counted as a business expense when calculating your Corporation Tax and that it’s illegal to pay a dividend if your company does not have sufficient profit after tax available to cover the dividend amount.

Any ‘retained profit’ in a limited company could have been accumulated over a number of years. If the director(s) choose not to distribute any excess profits as dividends at the end of the company’s accounting period, then the accumulated profit remains available to distribute at a later date.

Usually, the most tax-efficient way to pay yourself as a director is by taking a combination of a low salary and dividends from your limited company. The salary will be paid to you as a director, in the same way as a regular employee.

How does your company issue a dividend?

If you want to issue a dividend, then you need to hold a meeting of directors to “declare” the dividend. The meeting needs to be minuted and a record kept of it. This is the case even if you are the sole director of your limited company, though it may then just be a case of issuing the correct paperwork.

For each dividend payment your company makes, you need to issue a dividend voucher that shows the following:

• date the dividend is paid

• company name

• names of the shareholders being paid a dividend

• amount of the dividend.

You should give a copy of the voucher to all recipients of the dividend amount and keep a copy for your company’s records.

Dividends should usually be distributed according to the percentage of company shares owned by each shareholder. So, If you own half the company’s shares, you should receive 50% of each dividend distribution.

Your company does not need to pay tax on any dividend payments it issues, but the shareholders may have to pay tax on the dividends they receive based on their personal circumstances, through their annual Self Assessment.

Running your business as a limited company can be a tax-efficient way to operate, as neither the company nor you as an employee will need to pay National Insurance Contributions (NICs) on dividends.

If you take a higher salary than the relevant National Insurance (NI) thresholds, both employer’s and employee’s NICs would be payable. Many limited company owners combine dividend payments with a low salary to operate their business and their personal finances tax-efficiently.

Self Assessment

If you don't already complete an individual Self Assessment tax return, receiving dividends may mean you need to complete one.

‍You'll need to declare the total dividend income you've received on your Self Assessment tax return, whether the dividends come from your own limited company or another company you hold shares in. The higher your income from dividends compared to the personal tax thresholds, the higher your dividend tax rate.

If you receive dividends from companies where you aren’t a director, and you don't currently complete a Self Assessment, you can either ask HMRC to change your tax code if you are paid through PAYE, or if the amount you receive is over £10,000, you will need to start completing a Self Assessment.

The dividend tax rate you pay is based on your total income from all sources, not just on your dividend income.

Dividend Allowance

You can earn up to £2,000 in dividends in the 2022/23 tax year and £1,000 for the 2023/24 tax year, before you pay any Income Tax on your dividends, this figure is over and above your Personal Tax-Free Allowance of £12,570 in the 2023/24 and 2022/23 tax years.

Dividend Rates

Once you’ve used up your Personal Allowance and the tax-free Dividend Allowance of £1,000, any further dividends you receive, from any source, will be taxed.

The amount of personal tax you pay on income from dividends is based on your tax band (also known as your ‘marginal rate’). The rates of tax you pay are lower than the income tax rates, which is one of the reasons dividends are so tax-efficient for limited company directors.

The rates for 2023/24 will be as follows:

• Basic-rate taxpayers pay 8.75%

• Higher-rate taxpayers pay 33.75%

• Additional-rate taxpayers pay 39.35%

If you’re a Scottish taxpayer, although your Income Tax is based on the Scottish Income Tax Rates, you’ll need to calculate and pay any tax due on dividends (or savings income) using the UK tax rates and thresholds.