Dividend Distribution and Dividend Tax Guide
If you are a limited company shareholder, you may have to pay tax on any dividend income you receive. Here we explain how company dividends are taxed and how to calculate the amount of tax due on dividend income.
Any income you receive in the form of company dividends is taxed separately to income you get in the form of salary or pension.
All company dividends – whether they are from stock market listed firms or your own limited company – are taxed in the same way.
One important point to note is that no tax is due on any dividends received from shares that are held in an ISA.
If you run your own company, the most tax-efficient way to draw down funds from the business in the form of a low salary, and the bulk of remaining funds in the form of dividends. Dividends are not subject to Employers’ NICs, whereas salaries are.
Distributing company dividends
To work out the total amount of dividends that can be distributed to company shareholders, you need to subtract the value of all company expenses from your turnover. Expenses include anything owed by the business, including taxes at any point in time.
These ‘retained earnings’ can be distributed as dividends to shareholders, and you must distribute the funds in line with the percentage shareholding each shareholder owns.
If you have retained profits brought forward from previous accounting periods, these can also be distributed as dividends.
Dividend Timing
There are no rules governing how frequently you can distribute dividends, although many larger companies do so on a quarterly basis. Or you may prefer monthly dividends for cashflow reasons. Although the general advise is against this as regular dividend payments might be seen as a salary and HMRC could challenge regular payments and re assign them as employment income which would be subject to NIcs.
The key thing is, you must only distribute the retained earnings of your company
e.g., Profit after tax.
Correct dividend paperwork
To comply with the rules which, govern limited companies, you are required to prepare company board meeting minutes each time you declare a dividend. Each shareholder should be given a voucher which contains details of the distribution.
Dividend Tax Rates
The amount of tax you pay on dividends over your £2,000 dividend allowance is determined by your income Tax Bands.
The tax rates payable on dividends are as follows:
Basic rate taxpayers (up to £50,270 for 2022/23) pay 8.75%
Higher rate taxpayers (up to £150,000 for 2022/23) pay 33.75%
For the 2022/23 tax year, the dividend allowance is £ 2,000. This means that you do not need to pay tax on the first £2,000 of dividend payments you receive.
You do not pay tax on any dividend income that falls within your Personal Allowance (the amount of income you can earn each year without paying tax).You also get a dividend allowance each year. You only pay tax on any dividend income above the dividend allowance. You do not pay tax on dividends from shares in an ISA. To work out your tax band, add your total dividend income to your other income. You may pay tax at more than one rate.
Example
You get £3,000 in dividends and earn £29,570 in wages in the 2022 to 2023 tax year.
This gives you a total income of £32,570.
You have a Personal Allowance of £12,570. Take this off your total income to leave a taxable income of £20,000.
This is in the basic rate tax band, so you would pay:
• 20% tax on £17,000 of wages
• no tax on £2,000 of dividends, because of the dividend allowance
• 8.75% tax on £1,000 of dividends