Dividends can be a confusing subject, with many directors not knowing what it is, and what the tax on dividends implication is. With all these questions we are here to help you navigate dividends.
What are dividends?
To make it simple a dividend is a distribution of profits made by a limited company to its shareholders. The next question that pops up in every shareholder’s mind is “What is the maximum dividend the shareholders can receive?” and why not, they are here to maximise their returns after all. As the opening sentence suggests, dividends can only be paid out of company profits and a company cannot pay out more than the profits available from current and previous years. As it must be clear now, dividends are a distribution of profits and hence cannot be considered a business expense or outgoing when filing your annual accounts either.
Tax on dividends
- Income tax on dividends
The amount of tax on dividends would be dependent on your income tax band and whether or not the dividends will take you over your personal tax allowance for that year.
- Personal Tax on dividends
Everyone gets a 0% personal tax allowance up to £12,570 per year, once you go over this it is 20% (basic rate) up to £50,270 per year, then 40% (higher rate) for up to £150,000 per year, and finally 45% (additional rate) for over £150,000 per year. If your dividends and personal income are below £12,570 per year you will not pay any tax.
Over this, the basic rate is currently 8.75% for dividends,
The higher rate being 33.75% and
The additional rate is currently 39.35%.
There are some exceptions to this; for example, you would not pay any tax on dividends from shares in an ISA (Individual savings account) or if your dividends income is below the dividends allowance, currently £2,000, then you will not pay tax on this even if you’re over your personal tax allowance for that year.
Company directors by default are not eligible for dividends. Only the ones who are (also) the shareholders in the company are eligible for receiving dividends, therefore, you as a director can take a dividend pay-out from your limited company only if you are also a shareholder of the company, but again you can only take this out of company profits.
Keep in mind the tax you will need to pay on this especially if you’re taking a dividend payment on a regular basis and go above the £2,000 dividends tax allowance. It would also be a good idea to keep up to date on any changes on these allowances as you end up paying more tax than you wanted.
Dividend amount and the sharing ratio
The company may issue any amount of dividend per share if there are necessary profits available to do the same. Dividend payments are always shared based on the quantum of shares held by each shareholder, therefore, you cannot choose to leave out any shareholder from the dividend distribution procedure, whether they are directors in the company or not.