What Tax Do I Owe on Dividends?

If you’re thinking of taking dividends from your limited company but are not sure how tax works in relation to them, we’ve put together a quick guide for you.

This short blog contains:

  • What are dividends?
  • Does Your Business Get Taxed on Dividends?
  • How Much is the Dividend Allowance?
  • What are the Dividend Tax Rates?
  • Using Dividends to Reduce Your Tax Bill

What are dividends?

First of all, dividends are the profits of a limited company that can be distributed to shareholders. This ‘profit’ is money leftover after your company has paid all business expenses and liabilities including Corporation Tax and VAT.

To issue dividends, you’ll need to hold a meeting of directors to officially declare them – records of this meeting should be kept on file.

Vouchers for dividends can then be issued to shareholders (or just the sole director) which should include the company name, shareholders’ names, date of payment and the value of the dividend. These dividends should be calculated based on each shareholder’s share in the company. For example, someone with a 20% share gets 20% of profits as dividends and so on.

Once you receive a dividend, there’s still something very important to consider – the tax you need to pay on it.

Does Your Business Pay Tax on Dividends?

Your company itself will not be taxed on dividend payments it makes. Instead, the shareholders who receive the dividends must pay tax on it as income through their annual Self Assessment.

How Much is the Dividend Allowance?

Before you pay any income tax on your dividends, there is an allowance you can earn up to. You can currently earn up to £2,000 in dividends before you owe income tax – this number is in addition to your personal allowance of £12,570.

Is There a Different Rate of Tax on Dividends?

The dividend tax rates for the tax year 2022/23 are as follows:

  • Basic-rate taxpayers owe 8.75%
  • Higher-rate taxpayers owe 33.75%
  • Additional-rate taxpayers owe 39.35%

For each rate, there is a different tax threshold that applies after your personal allowance has been used.

Basic-rate taxpayers are taxed at 8.75% on dividend income between £2,000 and £37,700 (after the personal allowance). If you earn more than this, the higher-rate tax of 33.75% applies to income between £37,700 and £150,000. If you earn more than this, the additional rate applies. This is 39.35% on any income above the threshold of £150,000.

Using Dividends to Reduce Your Tax Bill

As the dividend tax rates are less than that of regular income tax, there’s an opportunity to reduce your tax bill so you’re not over-paying.

Many business owners will take a small director’s salary (up to the National Insurance threshold) and then take the rest of their income as dividends. This allows them to take advantage of both the dividend allowance and the lower tax rates.

For more information on how to do this, the best thing you can do is speak with your accountant as they will be able to give you personalised advice on what the best practice for you will be.

If you are looking for an accountant, get in touch with Countplus Accounting today for a free quote and low-cost monthly fees.

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