What are dividends?
As a small business owner of a limited company, dividends are a means of paying yourself, often in a more tax efficient manner than via PAYE.
Dividends are a distribution of the profits of a business (after tax) to its shareholders.
A limited company is a separate legal entity to you, the business owner. As such you will likely have multiple relationships with your business. You will most likely be the director of the business but also a shareholder of the business.
You might be the only shareholder of your business or there may be other shareholders such as business partners or family members.
When a company makes profit, the directors choose whether to keep that profit in the business and reinvest it or distribute some or all of its profits back to the shareholders.
When can you take a dividend?
Dividends can be paid out at any time, some business owners choose to make a single annual dividend payment while others opt for interim dividend payments.
This will be down to personal circumstances and cash flow requirements of both the business and the shareholders.
The most important factor to consider when issuing a dividend is that there is sufficient retained earnings within the business to declare a dividend. As mentioned earlier, dividends are a distribution of profits, so no profits = no dividends.
How do you report dividend income and how are dividends taxed?
Dividend income is reported to HMRC via a self assessment tax return and taxed at the following rates;
Basic rate 8.75%
Higher rate 33.75%
Additional rate 39.35%
You do not pay National Insurance Contributions on dividend income.
There is also a tax free allowance for dividend income which has slowly been reduced over the last few tax years.
2022/23 £2,000
2023/24 £1,000
2024/25 £500
When do you pay tax on dividends?
The deadlines for paying tax on dividends are the 31st January and 31st July each year.
Example
Sienna received a £20,000 dividend from her limited company on the 4th March 2024.
The 4th March falls into the 2023/24 tax year (06/04/23 - 05/04/24). The deadline to complete her self assessment tax return and pay any tax owed is 31st January 2025.
Sienna is a basic rate taxpayer who has already used up her personal allowance via a salary from her limited company.
Her tax calculation for the dividends will look like this;
Dividend income £20,000
Minus dividend allowance £1,000
Total taxable dividend income £19,000
£19,000 x 8.75% = £1,662.50
Sienna will pay the tax owed on her dividends plus an extra 50% as a first payment on account. The second payment on account will be 31st July.
Tax due 31 January 2025 - £2,493.75
Tax due 31 July 2025 - £831.25
HMRC works on the assumption that you will earn the same income next tax year as you have reported this year.
So by the time we roll around to 31 January 2026 you will have already paid your tax on another £20,000 of dividend income.
If your dividend income turns out to be less than what you earned last year, you’ll get a refund from HMRC, if you had more, you’ll pay an extra amount of tax, known as a balancing charge.
We can help you stay on top of your tax liabilities by keeping track of your dividend income and forecasting your tax bills and when they’ll need to be paid.
Interested to find out more about how we can help you? Book a discovery call using the button at the top of the screen.