If you own a limited company that has made and retained a profit, it’s likely you’ll be familiar with paying your shareholders (and maybe yourself) in dividends at some stage.
Dividends don’t count as business costs towards your corporation tax calculation, but shareholders may have to pay income tax if the payment they receive exceeds the dividend allowance.
That stands at £5,000 until 6 April 2018, while the personal allowance of £11,500 can be added to give shareholders a tax-free threshold of £16,500 if their sole source of income is from dividends.
However, the tax-free dividend allowance is to reduce by £3,000 in April 2018 after the measure received Royal Assent in Finance Act (No.2) 2017 last November.
Despite the personal allowance slightly increasing to £11,850 for 2018/19, those who solely rely on dividends for their income will see their combined tax-free threshold lowered to £13,850 from 6 April 2018.
Any income from dividends above this allowance and extracted after 6 April 2016 will be liable for income tax at the following thresholds:
- basic rate – 7.5%
- higher rate – 32.5%
- additional rate – 38.1%.
What do I pay dividends on?
You pay dividends to all shareholders in your limited company if it has made a profit.
This means your limited company must not pay out more in dividends than its profits in the current and previous financial years.
To pay a dividend, you must hold a directors’ meeting to declare the dividend and you must keep minutes of the meeting, even if you’re the only director.
What paperwork is involved?
For each dividend your limited company pays, a dividend voucher must be written up showing:
- the company name
- the shareholders’ names who are being paid a dividend
- the amount of the dividend
- the date.
You must give a copy of the voucher to shareholders and keep a copy for your company’s records.
How do I extract dividends?
If you’re a director of your limited company, the most common way of paying yourself is through a combination of salary and dividends.
Dividends are not liable for national insurance contributions, so paying yourself a small salary and the rest in dividends from your company’s profits can be a tax-efficient strategy.
However, it’s imperative to seek professional advice before you adopt this strategy as a disproportionate salary-to-dividend ratio on your tax return may trigger an IR35 investigation.
Get in touch
There a several strategies to extract money out of your company and we’re happy to discuss the options available to you.