Our simple guide to understanding dividends for a limited company director

What is a dividend?

If you are new to the business world, you may have no idea what dividends are, or how they can help you make tax-efficient choices for your limited company.

As a director of a limited company, you can get lots of great benefits from taking out dividends, so let us break it down for you…

A dividend is a payment made by a corporation to its shareholders from its profits, after Corporation Tax has been accounted for.

Issuing dividends is usually a tax-efficient strategy, as they are subject to lower personal tax rates. To optimise tax efficiency, as a director you can combine taking dividends from your limited company with a modest salary. This approach allows you to benefit from both tax-efficient income streams. The salary will be paid to you as a director, in the same way as a regular employee.

But don’t forget, you cannot take out dividends if your company does not have sufficient profit after tax to cover the amount. Dividends also cannot be counted as a business expense when calculating your Corporation Tax.

You do not have to distribute all of your excess profits at the end of every accounting period. Instead, as a director, you can choose to take out your accumulated profits at a later date.

How can your company issue a dividend?

To issue a dividend, you must “declare” the dividend at a meeting of your directors (even if you are a sole director of your limited company). This meeting must have minutes taken and be recorded, and you must issue a dividend voucher detailing:

  • The date of when the dividend is paid
  • Your Company Name
  • Names of any shareholders being paid the dividend
  • Paid amount

Give a copy of this voucher to all recipients of the dividend, but also make sure you keep one for the record.

Will I pay tax on my dividend?

Your company does not need to pay tax on any dividend payments it issues. You and your company will also avoid paying National Insurance Contributions (NICs) on any dividends.

However, you may need to pay tax on the dividends you receive based on your personal circumstances. Your Self Assessment tax return will need to include your total dividend income and where the dividends come from (e.g. your own limited company or another company you hold shares in). Your dividend tax rate will be higher depending on how high your income from dividends is compared to your personal tax thresholds.

What is my dividend tax rates for the 2023/24 tax year?

Your dividend tax rate is based on your total income, not just on your dividend income. You will not pay any Income Tax on the first £1,000. Once you’ve used up your Personal Allowance and the tax-free Dividend Allowance of £1,000, you will be taxed on any further dividends.

Your tax band will decide how much personal tax you will need to pay. However, one of the reasons dividends are so tax-efficient is that these tax rates are lower than those for income tax.

The rates for 2023/24 are:

Basic-rate taxpayers – 8.75%
Higher-rate taxpayers – 33.75%
Additional-rate taxpayers – 39.35%

Remember that if you’re a Scottish taxpayer, you’ll need to calculate and pay any tax due on dividends using the UK tax rates.

Has this been helpful? Contact us to assess your options and to find out what decision will benefit both you and your company in the long run!

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