You may have recently started your firm and incorporated, or you may have switched to a limited company structure. Whatever your circumstances, you’ve almost certainly heard about dividends in business circles but may be unfamiliar with them. Therefore, if you operate a limited company, this blog post will assist you by defining dividends, when they can be paid, and how they are taxed.
- What are dividends?
- How does the company issue dividends?
- How are dividends taxed?
- Annual tax-free dividend allowance and UK dividend tax rates for the 2021/22 and 2022/23 tax years
What are dividends?
Dividends are sums paid (or refunded) to shareholders from a company’s profits. A corporation can pay dividends only if it has earned a profit. The dividends paid by the company cannot exceed the company’s available profits for the current and preceding financial years. In case your limited company makes a profit, it has the option of paying a 'dividend' to shareholders. Profit is the amount of money left over after all business expenses and liabilities are met, including any unpaid taxes (like Corporation Tax and VAT). Dividend taxes are levied at a rate determined by HMRC on all dividend payments received. Anyone having dividend income, regardless of their non-dividend income, will receive tax-free amount of £2000 as allowance.
It's important to note that dividends cannot be deducted as a business expense for corporation tax purposes. Paying a dividend is prohibited if your business does not have sufficient earnings after tax to cover the pay-out.
Any 'retained profit' in a limited company may have accrued over time. If the directors decide not to provide surplus profits as dividends at the conclusion of the accounting period, the generated profit is retained for distribution later.
Generally, the most tax-efficient method of paying yourself as a director is to take a low salary and dividends in a combination from your limited company. As a director, you will be paid in the same manner as a normal employee. Refer to our article on "How much should I take as a salary from a limited company?"
How does the company issue dividends?
To declare a dividend, you must organise a directors meeting to "declare" the dividend. The meeting must be minuted, and a record must be maintained. This is true even if you are the sole director of your limited company, but, in that instance, it may simply be a matter of completing the necessary paperwork. If you use a quality online accounting software system, such as nomisma, it should often handle all of the administrative tasks for you.
You must issue a dividend voucher for each dividend payment made by your company. The dividend voucher must have the following information:
- Name of the company.
- Dividend payment date.
- Names of the shareholders receiving the dividend.
- Dividend amount.
You should send a copy of the voucher to all dividend recipients and retain a copy for your company’s records. Dividends should usually be provided in proportion to each shareholder’s percentage ownership of the company. Therefore, if you own 50% of the company’s stock, you should receive 50% of all dividend distributions.
How are dividends taxed?
Operating your business through a limited company might be a tax-effective strategy, as neither the firm nor you as an employee will be required to pay national Insurance contributions (NICs) on dividends.Your company is not required to pay tax on any dividend payments made, but shareholders may be required to pay dividend tax they receive through their yearly self-assessment.
If your salary exceeds the applicable national insurance (NI) criteria, both employer and employee NIC’s will be due. Many company owners of the Limited company combine dividend distributions with a low salary to maximise the tax efficiency of their business and personal finances. Dividends received from shares held in an ISA are tax-free.
Annual tax-free dividend allowance and UK dividend tax rates for the 2021/22 and 2022/23 tax year
In the 2021-22 tax years, you will not be required to pay tax on the first £2,000 of dividend income received. This is referred to as the tax-free dividend allowance.Above this tax-free dividend income threshold, you pay tax at the rate applicable to your other income, referred to as your tax band or marginal tax rate.
Additionally, you can avoid paying tax on investment income in case you hold shares or funds through a stock and shares ISA. If your only source of income is from investments, you may also utilise your tax-free personal allowance before beginning to pay dividend taxes. Thus, in addition to the £2,000 dividend exemption, you can earn an additional £12,570 tax-free in 2021-22 (raised from £12,500 in 2020-21).
Dividend tax rates are lower than income tax rates, which are considered as one of the reasons for dividends to be so tax-efficient for directors of limited companies.The below table summarises the dividend tax rates applicable to basic, higher, and additional rate taxpayers in 2021-22, as well as their projected changes in 2022-23.
| Income tax band | From | To | Dividend tax rate 2021-22 | Dividend tax rate 2022-23 |
|---|---|---|---|---|
| Basic-rate (£12,570-£50,270) | £2,000 | £37,500 | 7.5% | 8.75% |
| Higher-rate (£50,271 - £150,000) | £37,501 | £150,000 | 32.5% | 33.75% |
| Additional-rate (Above £150,000) | Above £150,000 | - | 38.1% | 39.35% |
Conclusion
At dns accountants, we can assist you in paying yourself tax efficiently by taking care of all your HMRC payroll and dividend forms. You’ll receive all necessary support and advice, as well as assistance with your company’s tax return filing. Additionally, we will also prepare and file your annual self-assessment tax return.
In case you have queries or want specialist advice on "dividends and how they are taxed as per the latest dividend tax rates", kindly call dns accountants on 03330 886 686, or you can also e-mail us at info@dnsaccountants.co.uk.
Disclaimer :-"This article was correct at the date of publication. It is intended for general purposes only and does not constitute legal or professional advice. Independent professional advice should be sought before proceeding with any transaction".
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Sumit Agarwal
Sumit Agarwal (ACMA ACA India), the Managing partner of dns accountants is a highly respected accountant with expertise in helping owner-managed businesses.
