Taking dividends from your limited company
Posted on 11th April 2024
As a shareholder in a limited company there are several ways to use money in its bank accounts.
If the company is a registered employer, you can pay salaries, expenses, and benefits and you can receive money the company owes you. Shareholders can also receive dividends, but this is something many business owners find confusing.
Dividends
A dividend is a payment the company can make to shareholders, provided it has made a profit.
The first important point is that you can’t count dividends as business costs, so they aren’t offset against your Corporation Tax.
The second important thing to know is that your company can’t pay out more in dividends than its available profits. This is an ‘illegal dividend’ and you could become personally responsible for your company’s liabilities.
Dividend payments are usually made after the end of your company’s financial year. However, the directors can decide to pay interim dividends at any time. Normally all shareholders receive dividend payments.
What counts as profit
There are non-cash items which can affect your profit, such as depreciation of capital assets. Before you can pay a dividend, your profit and loss account must show that there is enough profit available after tax, normally called a 'carried forward’ or ‘distributable' amount.
How to pay dividends
To pay dividends, you must hold a directors’ meeting to ‘declare’ them and keep minutes of the meeting. You must do this even if you are the only director.
For each dividend payment the company makes, you must provide a dividend voucher showing the:
date
company name
names of shareholders
amount of the dividend.
Everyone who receives a dividend must receive a copy of the voucher and you must keep a copy for your company’s records.
Tax on dividends
Your company won’t pay extra tax on dividends but shareholders might have to pay Income Tax. This applies if they receive over £1000 in the year to April 2024 but reduces to £500 for 2024/25.
The amount of tax paid above the dividend allowance depends on your personal Income Tax band.
|
Tax band |
Tax rate on dividends over the allowance |
|
Basic rate |
8.75% |
|
Higher rate |
33.75% |
|
Additional rate |
39.35% |
To work out your tax band, add your total dividend income to your other income. You might pay tax at more than one rate.
Here’s an example:
You received £3,000 in dividends and earn £29,570 in wages during the 2023 to 2024 tax year.
Your total income is therefore £32,570.
You have a Personal Allowance of £12,570 before you pay any tax which you can deduct, leaving taxable income of £20,000.
This is within the basic rate tax band, so you would pay:
20% tax on £17,000 of your salary = £3,400
no tax (0%) on £1,000 of dividends, because of the dividend allowance
8.75% tax on £2,000 of dividends = £175
If you would like some advice about paying dividends from your limited company or to know more about our company secretarial service, please get in touch.
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