Dividends are payments made to shareholders from the profits of a company after calculating corporation tax, and taking into account previous years losses. It can be the most tax efficient way of taking money from your company. Dividends are not classed as a business expense and therefore cannot be used to reduce profits.
Accumulated retained profits from earlier years can be used to declare a dividend. Please note that it’s illegal to pay a dividend if your company does not have enough profits to cover the dividend amount.
How do I take a dividend?
A record needs to be kept during a directors meeting detailing the distribution of the dividends. If you are a sole director, just a dividend voucher needs to be completed. The voucher needs to be given to each shareholder (keeping a copy for your records) and show the following detail:
- Company Name
- Date of payment
- Amount of payment
- Name of shareholder being paid
Dividends are distributed according the percentage of shares held by each shareholder. For example: £10,000 dividend divided by 3 shareholders, Bob has 50% shareholding and, Harry and Bill both have 25% each would mean Bob would receive £5,000 and Harry and Bill would each receive £2,500.
The individual shareholders pay tax (after taking off tax free allowances) via Self-Assessment; it has nothing to do with the company.
Taking dividends through your 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 on company dividends.
What is the tax rate on dividends?
For 2019/20 the dividend allowance is £2,000 tax free, this is in addition to your personal allowance (2019/20 £12,500)
Any dividends over £2,000 are taxed as follows: (2019-20 rates)
|Additional Rate||38.1%||£150,000 +|
Salary or dividends?
In 2019/20 you’ll have a personal allowance of £12,500. This is the amount you can earn tax free from any source. If you’re a director without a contract you are not subject to National Minimum Wage requirements so you can pay yourself a low salary and top your earnings up by way of dividends.
In order to maintain your State Pension record you have to pay yourself over the National Insurance Contribution “Lower Earnings” limit which is £6,136, but if you keep below the National Insurance Contribution “Primary Threshold” of £8,632 no National Insurance is payable.
It’s worth taking to us in more detail, as a salary that’s too low can cause reduced maternity benefits, and problems when applying for a mortgage or loan.
Using The “primary threshold” as an example, the calculation below shows the maximum you can take in salary and dividends without going into the higher rate of tax (2019/20 rates).
|Dividends Taxable @ 7.5%||£35,500|
|Income Tax Due||£2,663|
Each case is different and this blog is for guidance only, If you have any questions, get in touch with a member of our team.