What is a dividend?
A dividend is a payment made to limited company shareholders from company profit or retained earnings (accumulated profit from previous financial years).
How does a limited company pay dividends to its shareholders?
Dividends are usually paid to all shareholders. To pay a dividend the company must hold a directors meeting to declare the dividend and produce a dividend voucher that includes the date of payment, company name, names of the shareholder(s) being paid a dividend and amount of the dividend(s) paid.
Are there any restrictions on dividend payments?
Dividends can only be paid from profits or retained earnings. If the company has made a loss and holds no retained earnings on its balance sheet it will not legally be able to pay dividends.
In this circumstance, as a limited company director you can still pay yourself a salary via PAYE payroll.
How are dividends taxed?
The first £2,000 of dividends paid during the financial year (6th April to 5th April) are tax free, this is known as the "dividend allowance." Subsequent dividend payments are taxed at 7.5% at the basic rate (total earnings of £14,570 to £52,270 including the dividend allowance) and 32.5% at the higher rate (total earnings of £52,271 to £150,000).
Dividend tax is calculated and paid via your annual self-assessment personal tax return.
Note that allowances and tax rates are calculated firstly on employment income and then on dividends. E.g. earnings of £50,000 employment income would take into account the £12,570 personal allowance and 20% rate, £10,000 dividends then paid on top of this would take into account the £2,000 dividend allowance and 40% tax rate.
Are there any planned changes to dividends?
The government announced in the most recent budget that dividend tax will be increasing by 1.25% to 8.25% at the basic rate and 33.75% at the higher rate from April 2022 to fund a new "health and social care levy."
To read more about limited company tax changes announced in the budget see our article here - https://www.matrix-accounts.com/blog/764233_budget-2021-update-for-limited-company-directors
Do dividends paid affect corporation tax liability?
Dividend payments do not increase or decrease exisiting limited company liabilities for corporation tax.
However, it is important to note that dividends can only be paid from profits which are taxed at 19% corporation tax.
As a limited company shareholder and director would you advise I pay myself in dividends or pay myself a salary via PAYE?
If your limited company is your main source of employment income (i.e. your are not employed and taxed via PAYE elsewhere) then it is advisable that the company pays you a salary so you will accumulate national insurance contributions.
However, dividend payments usually work out as more tax efficient than PAYE salary payments so you may consider paying yourself via a combination of dividends and salary.
If you are receiving income elsewhere that is taxed via PAYE then it would be advisable to make payments solely via dividends.
Note - the £2,000 dividend allowance is tax free regardless of other income and cannot be carried forward so it is worth utilising this if the company has available profits or retained earnings.
For further advice and information on setting up and running a limited company contact firstname.lastname@example.org or call 01788 486065 for a free consultation.
- This article was written by Will Farmer MAAT,
AAT Licensed Accountant and Director of Matrix Accountancy Services Limited