To explain that fully, you need to understand what a dividend is, who can receive them and how much tax you’ll you pay on the dividends?
That sounds like there’s so many questions but it’s really not that complicated. Don’t worry bear with us and we’ll explain in the Aspire way. No jargon, and easy to understand.
First of all, what’s a dividend ?
It’s a tax efficient way of taking money out of a Limited company. Normally the company will pay a dividend to shareholders out of the profits which are left over after deducting the amount of Corporation Tax. Anyone who owns a share in the company can receive a dividend payment and it’ll be paid in proportion to the amount of shares which they hold. What you normally find is that a Director will take a small amount of money as a salary and pay themselves a dividend as this is more tax efficient.
So now you know who is entitled to receive a dividend, your next question will no doubt be how much tax and national insurance will you pay?
The good news is you don’t pay any National Insurance on a dividend. Unfortunately though (booo!) you will need to pay tax. The amount you pay depends on your total income and how much of that is specifically from dividend payments.
Basically, you have a tax free personal allowance which varies depending upon your income. There’s also a tax free allowance for dividend income on top of the personal allowance – did that make you smile? As we said earlier, dividends can be as a tax efficient way of taking money out of the business.
So, let’s look at some numbers (you know we LOVE numbers here!)
- First of all, the first £2000 is tax free on any dividend. You only get taxed a percentage of any money you receive over that amount.
- If you earn £0-£12570 you pay no Income Tax and no dividend tax
- If you earn £12571-£50270, you’ll pay the Basic Rate Income Tax and 8.75% on any dividend payment over £2000
- If you earn £50271-£150,000, you’ll pay the Higher Rate Income Tax and 33.75% on dividends over £2000
- And if you earn £150001 upwards then you’ll pay the Additional Rate Income Tax and 39.35% on dividends over £2000
These amounts are correct from April 2022 to March 2023 and at the moment, the rates are slightly higher because of the new Health and Social Care Levy.
One thing we haven’t explained yet is how you work out which tax bracket you fall into. That’s easy as all you need to do is add your total dividend and any other income you receive together and hey presto, the number you arrive at will fall into one of the categories above.
One final point to mention is the legalities – You can pay dividends as often as you like, just remember to follow the regulations. Every time you pay a dividend you need to hold a directors’ meeting to declare the dividends, even if you’re the only director.
You’ll need to keep minutes of the meeting too. For every dividend payment, you’ll need to produce a dividend voucher with the date, company name, names of shareholders and the amount of the dividend. Most companies pay dividends quarterly, though some companies choose to pay either bi-annually or annually
It’s simple really but if you need the help of a super friendly accountant who can talk you through the steps and help you with templates and produce the paperwork trail you’ll need then we’re always here with a waiting kettle and a welcoming smile (and on most days, an extra special greeting from our employee Winnie, our Chief Barketing Officer and Receptionist!)