You are the shareholder of a limited company and the company showed a profit in the year end accounts or have a built up shareholders funds from previous profits. These profits can be distributed to shareholders as dividends. This guide explains what dividends are and how they are taxed.
Distribution of Dividends
Dividends are a share of profits paid to shareholders of a limited company.
It is important to note that dividends can only be taken if the company has sufficient profits to be able to cover the dividends.
Shareholders receive dividends which equate to the distribution of shares within the company. i.e. If you own 20% of the company you are entitled to 20% of the profit of the company assuming all the shares carry equal rights.
Generally, shareholders opt for a combination of dividends and salary as this is generally the most tax efficient way of extracting money from the company as dividends are subject to a much lower tax rate than a salary. In addition, National Insurance Contributions are not payable on dividends.
However, dividends are not seen as an expense to the company, so they do not reduce the profit of the company whereas a salary is seen as an expense. This means a salary reduces the profit of the company thereby reducing the Corporation Tax liability. The reason for opting for the combination method is that we use part of your tax free allowance for the salary which brings the profit of the company down, thereby reducing the Corporation Tax liability and top up the wages with dividends which attract a much lower tax rate.
The basic tax rate due on dividends for 22/23 is 8.75%.
An individual is also entitled to a dividend allowance of £2,000 before tax is due reducing to £1,000 in the tax year 2023 to 2024 with a further reduction in 2024 to 2025 to £500.
All your income needs to be reported to HMRC via a self assessment. This includes your salary and dividends. From here your tax liability is determined.
Need advice on dividends tax?
BKS Accounts are happy to advise further on the best way to pay yourself when you’re a shareholder of a limited company.