When your limited company makes a profit, you can choose to pay a percentage of that profit to your shareholders. This is known as a dividend payment and is one of the most common ways for directors and shareholders to extract cash from a successful business.

But did you know that the dividends you receive are taxed separately from other sources of income? Or that dividends have their own tax rate, and that this rate recently increased?

We’ll explain how dividends are paid and taxed – and how to do this tax-efficiently.

How do dividends work?

Dividends are the payments you receive on shares you hold in a company. This could be shares in your own company or shares you hold in a publicly listed one.

The company pays corporation tax (CT) on its profits and the amount left after that is potentially available for it to pay out to its shareholders. As a shareholder, this means you’ll receive a dividend payment, with the amount you’re paid decided by the company.

How will your dividend payments be taxed?

Although the company has already paid CT on its business profits, as a shareholder you must still pay tax on the personal income you’ve received in the form of dividend payments.

The process of taxing your dividends works like this:

  • Dividends are taxed after other income has been dealt with. So, things like salaries, self-employment income and property rental income are taken into account first.
  • Every individual has a tax-free allowance. For most people this will be £12,570 for the current tax year. Above that threshold:
    • The next £37,700 is the basic rate band (BRB)
    • This is followed by £112,300 of higher rate band (HRB)
    • And all further income falls into the additional rate band (ARB).
  • The rate of tax on your dividends depends on which band your income falls into, after the other types of income have been taken into account:
    • Dividend income in the BRB is taxed at 8.75%
    • In the HRB it’s taxed at 33.75%
    • And in the ARB, the rate of tax is 39.35%.
  • Other kinds of personal income are taxed at 20%, 40% and 45% respectively, so you can see the need to manage your dividend tax planning carefully.
  • No tax is charged on the first £2,000 of dividend income regardless of which band it falls into. Also, dividends held in a Stocks and Shares ISA are not taxable.

Talk to us about dividend tax planning

To make sure you don’t lose out when receiving a dividend payment, it’s important to think about dividend tax planning as part of your ongoing tax strategy.

We’ll help you find the best mix of dividends and salary payments to extract funds from your company. This meets your compliance needs and also minimises the tax charged by HMRC.

Let’s sit down to run through your planned dividend income and check that you’re taking money out of the company in the most tax-effective manner.

Get in touch to talk about dividend tax planning.