What are dividends and
What taxes do I pay on them?
If you are running a limited company or about to start a business of your own you should be familiar with dividends.
Dividend is the sum of money which is paid to the director/shareholder of the company. Dividend is distributed to the director or the directors of the company after the company has deducted all its expenses from the income and paid all the liabilities such as corporation tax. It should be noted that the dividend cannot be treated as an expense.
Dividend can be distributed to the shareholders at any time during the year. It can be paid monthly, quarterly or yearly or at any frequency as decided by the directors of the company.
When you are running a limited company you can also pay yourself salary. Salary has different tax implications as compared to the dividends. Therefore we always recommend our clients to keep a record of dividend vouchers and minutes of the meeting in which the dividends were declared in order to make sure that dividends are not confused with salary by HMRC as different tax liabilities arise in each case.
TAX IMPLICATIONS OF DIVIDENDS
DIVIDEND ALLOWANCE
£2000- The dividend allowance for the tax year 2020/2021 is £ 2000. This means you can pay yourself a dividend of £2000 without paying any taxes on it.
IS THERE ANY TAX MY COMPANY WILL PAY ON THE DIVIDENDS?
When a company is giving out dividends it does not need to pay any taxes on it. Company does not pay any National Insurance when dividends are drawn out of it.
WHAT TAX WILL BE PAID BY THE DIRECTOR WHEN HE RECEIVES THE DIVIDEND?
When tax is paid to the director the director will have to declare it in his annual self- assessment, failure to do so can result in penalties How much tax you pay will depend on which income tax rate band your total income falls into.
| Basic rate tax payers | 7.5% |
| Higher rate tax payers | 32.5% |
| Additional rate tax payers | 38.1% |
The personal allowance for the year 2020/ 2021 is £12500. After the personal allowance is used the following thresh holds will apply:
| £2000-£37500 | Basic rate-7.5% |
| £37501-£150 000 | Higher rate- 32.5% |
| £150 000- up | Additional rate- 38.1% |
It is a usual practise that the directors of a small limited company pay themselves a small amount of salary and draw the rest of the earnings as dividends to manage their finances tax efficiently.
Look at the example below where the director of a limited company with a minimum salary of £8788 (the NI threshold)is getting a dividend of £ 30 000 per annum. How much personal tax will he need to pay to HMRC?
| Income type | Income (£) | Income tax rate/ Allowance | Tax Liability |
| Salary | 8788 | Personal allowance | Nil |
| Dividend | 3712 | Personal allowance | Nil |
| Dividend | 2000 | Dividend allowance | Nil |
| Dividend | 24 288 | Basic rate-7.5% | 3462 |
| Total Income | 38 788 | 7.5% | 3462 |
Try tax efficient to combine minimum salary and dividend, however, it doesn't make a very attractive bank statement when you are applying for a mortgage.
If you are taking salary more than the NI threshold and you need advice in managing your financial liabilities it will be worth considering a professional financial advice. We at Taxaccolega have an expert team of accountants and we will give you advice tailored to your personal circumstances and business If you want us to do your self-assessment Call us at 020 8127 0728 or drop us a message here and we will get back to you.
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