If your business is set up as a limited company, paying yourself dividends alongside a salary is usually the most tax efficient way to draw money out. To help you manage the legal requirements of paying yourself from your business, we’ll explain how often you can take dividends, and how the process works.
What is a dividend?
A dividend is the payment of a portion of a company’s profit, and is paid to its shareholders. Profit is essentially what is left over in the business once all taxes, expenses and liabilities have been paid. Also called ‘retained profit’, this left over money may accumulate over time. Watch our short video below about paying yourself from your limited company using dividends.
How much can my company pay as a dividend?
There’s no limit, and no set amount – you might even pay your shareholders different dividend amounts. Dividends are paid from a company’s profits, so payments might fluctuate depending on how much profit is available. If the company doesn’t have any retained profit, it can’t make dividend payments. Doing so will likely to see you end up in hot water with HMRC, with penalties to pay!
Before you pay yourself or your shareholders a dividend, it’s important you make sure there’s enough money in the company to cover day-to-day cash flow. It’s also good to leave some profit in the business after paying dividends so there are funds available for other activities, like upgrading assets or investing in growth.
When can my company pay a dividend?
There aren’t any hard and fast rules about how frequently you can pay a dividend, and you can basically pay yourself or your shareholders whenever you like.
That said, regularly taking ad-hoc payments at random points throughout the year can sometimes indicate that there are issues with the way that funds are being managed. Most businesses distribute them quarterly or every six months, after working out what profits are left over.
The timing of dividend payments may affect how much tax you pay
For many businesses, particularly in the wake of the pandemic, profits can vary dramatically from one year to the next. In a particularly profitable year, you might take a tactical approach to paying dividends to pad out leaner times. This can also produce a more even income pattern, which makes personal financial planning less stressful, and can even help you avoid paying a higher tax rate.
For instance, if your company generates profits of £50,000 in year 1, and £10,000 in year 2, your company profits will be £60,000 over two years. Rather than paying a large dividend one year, and a small one the next, you might decide to declare dividends of £30,000 per year.
This means you’ll have a more regular income, and if all your income is from these dividend payments, you’ll be under the threshold for basic rate tax in each year.
Unlike a salary, dividends aren’t taxed at source, so you’ll need to declare them as part of a Self Assessment tax return. Any tax that’s due on dividends normally needs paying to HMRC by the January following the end of the tax year during which the dividend was paid.
So, if a dividend was paid in late March 2020 for example, the tax on it is due in January 2021. A dividend paid in late April 2020 falls into the following tax year, so the tax won’t need paying until January 2022 (though you can submit your tax return earlier than that!).
How does tax on dividends work?
Dividends come from the company’s after-tax profit, so it doesn’t pay tax in respect of any dividend payments it makes. The shareholders that receive a dividend will normally need to declare it on a Self Assessment tax return, and pay tax accordingly. We have a guide to help you get started with Self Assessment if this is brand new to you!
Business owners that operate as a limited company tend to pay themselves through a combination of a regular salary and dividend payments to be more tax-efficient. The most tax efficient salary for a company director depends on how many of you there are in the business.
You are able to earn a maximum of £2,000 in dividends in the 2021/22 tax year before any Income Tax is due. This is in addition to your Personal Tax-Free Allowance of £12,570 in the 2021/22 tax year.
What are the dividend tax rates and thresholds for the 2021/22 tax year?
The Dividend Tax Rates have remained unchanged for the last three years. Essentially, once your £2000 tax-free Dividend Allowance and your Personal Allowance have been used up, any other dividends you receive will be taxed, regardless of their source.
How much personal tax you’ll need to pay on income from dividends depends on your tax band (called your ‘marginal rate’). The rates aren’t as high as income tax rates, which is what makes dividends so tax-efficient.
Tax Threshold Name
Tax Threshold Values
Rate of Dividend Tax
£0 – £37,700
£37,701 – £150,000
It’s important to understand how dividends and tax work, and to keep clear financial records for the company and your own personal income. If you can’t prove that money you receive from your business is a dividend, HMRC may consider it a salary payment – and tax it accordingly. The rate of income tax is higher than the dividend tax rate, so it can end up being an expensive mistake, especially if you also land a penalty to go with it! Ouch.