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Dividend payments can seem confusing, especially because you’ll pay a different rate of tax on them than on your other income. We explain what dividends are, who can take them, and what you need to know about dividend tax.

What is a dividend?

Dividends are generally a tax-efficient way of taking money out of a limited company. The company pays dividends to shareholders out of the profits which are left over after deducting the amount due for Corporation Tax. The total amount of dividends paid out can’t be more than the company’s profits in the current or previous financial years.

Who can receive a dividend payment?

Anyone who owns a share in the company can receive a a dividend payment in proportion to the number (and type) of shares which they own in the company. The shareholders might be investors in the company, but they can also be employees, directors, or their relatives.

Directors often pay themselves a combination of a small salary, as well as dividend payments because this is more tax efficient.
 

How much tax will I pay on my dividends?

The amount of tax you pay on your dividends depends on your total income, and how much of that income is specifically from dividend payments. The good news is that you won’t need to pay National Insurance contributions on your dividend payments!

Tax allowances and dividend income

You can use the Personal Allowance (the amount you can earn before starting to pay income tax) as well as the Dividend Allowance.

The 2022/23 Personal Allowance

The tax-free Personal Allowance is the amount of income you can earn before starting to pay income tax on it.

If the dividends you receive are within your Personal Allowance, then you won’t need to pay any tax on them – as long as you aren’t receiving any other income.

The 2022/23 Dividend Allowance

There is also a tax-free allowance for dividend income, on top of the Personal Allowance. This means you could earn up to £12,570, and then take dividends up to the value of the Dividend Allowance before starting to pay tax.

If your dividend payments are more than both your Personal Allowance and your dividend allowance, you’ll only pay tax on the part of your earnings above the thresholds.

How much is dividend tax in 2022/23?

The rate of dividend tax that you pay is based on the tax band that you fall into after adding your total dividend income to any other income you receive. Because tax works in bands (a bit like a stack of blocks) you might pay different rates of tax in each band. Our tables below shows the tax bands for 2021/22 and 2022/23, as well as the rate of dividend tax you’ll pay in each band for that year.

To work out which band you’re in, add together your total income for the year (including dividends).

2022/23 Dividend Tax Rates and Thresholds

Thresholds 2022/23 Dividend Tax Rate 2022/23
Personal Allowance: no tax paid on income in this band. £0 – £12,570 0%
Basic-rate tax payers £12,571 – £50,270 8.75% on dividends earned above dividend allowance.
Higher-rate taxpayers £50,271 – £150,000 33.75%
Additional-rate taxpayers £150,001 upwards 39.35%

 

2021/22 Dividend Tax Rates and Thresholds

Thresholds 2021/22 Dividend Tax Rate 2021/22
Personal Allowance: no tax paid on income in this band. £0 – £12,570 0%
Basic-rate tax payers £12,571 – £50,270 7.5% on dividends earned above dividend allowance.
Higher-rate taxpayers £50,271 – £150,000 32.5%
Additional-rate taxpayers £150,001 upwards 38.1%

When and how do I pay myself dividends?

You can pay dividends as often as you like, just remember to to follow the regulations. Every time you pay a dividend you need to hold a directors’ meeting to declare the dividends, even if you’re the only director.

You will also need to keep minutes of the meeting. For every dividend payment, you will need to produce a dividend voucher with the date, company name, names of shareholders and the amount of the dividend. Use our free Director’s Minutes and dividend voucher templates. Most companies pay dividends quarterly, though some companies choose to pay either bi-annually or annually.

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Am I best taking a salary or paying myself in dividends?

If you are both a director and a shareholder of a limited company, the most tax-efficient way of earning an income may be to pay yourself through a combination of salary and dividends.

As a director, there is no minimum wage threshold so you can pay yourself as much or as little as you like in salary. If this is your sole source of income, the most common method is to pay yourself a salary up to the National Insurance threshold and pay any additional amount as a dividend.

If you have more than one shareholder or director, or another source of income, read our article about director’s salaries and dividends to find out more.

Find out how our online accounting services can help your business by talking to one of the team on 020 3355 4047, or grab an instant quote online.

About The Author

Elizabeth Hughes

A content writer specialising in business, finance, software, and beyond. I'm a wordsmith with a penchant for puns and making complex subjects accessible.

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