As a Limited Company owner you’ve probably heard the term dividend banded about. Here we take a look and learn all about dividends.
So what is a dividend?
The first thing to establish is that salary and dividends are different. Dividends are not a payment for work or services – that would be salary. Dividends are payments to shareholders relating to company profits, and can only be paid up to the maximum available profit.
Many Limited Company owners use dividends as a way to pay themselves in a tax efficient way. Dividends are taxed at more favourable rates when compared to salary.
When can dividends be paid?
A dividend can be paid at the discretion of the director, provided the company has a profit. This can be monthly, quarterly or annually, but the key is there must be profit to do so. If there is not enough retained profits then any payments would be allocated to the director’s loan account – there are different tax implications for both Limited Company and shareholder in these circumstances.
Any dividends paid need to be recorded, from the decision to declare a dividend through to providing each shareholder with a dividend voucher.
Remember, if you have multiple shareholders then dividend payments will need to be paid evenly per share held.
What tax and National Insurance is payable?
The first £2,000 of dividends received by an individual are considered tax free under the dividend allowance.
Remaining dividends are taxed at 8.75% if your personal total taxable income is less than £50,270, and 33.75% if greater. The tax rises further if you are an additional rate taxpayer (39.35%) but your total personal taxable income would need to exceed £150,000.
Dividends are also favourable as they do not incur any National Insurance.
Everyone is different
Personal circumstances are different and we recommend getting expert advice on your tax affairs, to make sure you are being paid in the most tax efficient way.
It is also important to remember that the tax due on dividends is paid via the self-assessment tax return and is not a Limited Company liability. So ensure you are setting aside the money personally to pay your tax bill.
How Taxevo can help
Calculating dividends and your tax responsibilities can be confusing, especially if you’re just starting out. Let the expert team here at Taxevo take the stress and strain out of your accounts, and help to show you the way. Get in touch today to find out more about how we can help you.