Dividends are payments made to the shareholders of a company. They are taken from the profits of a company after Corporation Tax and other expenses are paid.
Shareholders usually find that dividends are the most tax efficient method of taking money from a limited company. Here we are taking a look at what dividends are, how they can be issued, and the tax implications of taking them.
How do dividends work?
Dividends can only be paid if a company has sufficient profit left over after paying its taxes. It is illegal to pay a dividend if there is not enough profit to do so.
Dividends cannot be classed as a business expense for Corporation Tax purposes.
If shareholders wish to retain profit in a company rather than distribute it, they may do so, and may distribute any available funds at a later date of their choice.
How are dividends issued?
A meeting of directors must be held to declare the dividend. The meeting must be minuted and a record retained. Even if you are the sole director of your limited company you must follow this procedure.
For each divided paid, a voucher must be issued stating the date of payment, the company name, the names of the shareholders being paid and the amount of the dividend. The voucher should be given to everyone who has received the dividend and a copy retained.
Dividends are usually distributed in accordance with the shareholders’ individual interests. So if for example there are four shareholders, each owning 25 per cent of the company, then they will usually each receive 25 per cent of the dividend.
How does tax on dividends work?
Individual shareholders receiving dividends may have to pay personal tax through their Self Assessment on the amount received. This will depend upon the individual’s tax position.
No National Insurance Contributions need to be paid on company dividends.
If you draw a salary that exceeds the current National Insurance Primary threshold, then you would need to pay both employer’s and employee’s contributions. It is common practice for directors of limited companies to take a low salary together with dividends for the most efficient way of managing both company and personal tax arrangements.
For the 2019/2020 tax year, there is a dividend allowance of £2,000 before any income tax needs to be paid. This figure is in addition to the personal allowance of £12,500 for the 19/20 year.
One the dividend threshold is reached, basic rate tax payers are deducted 7.5 per cent on any amount from £2,000 to £37,500. From £37,501 to £150,000 this increases to 32.5 per cent, and on dividends of more than £150,000, the tax rate is 38.1 per cent.
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