Dividends can be withdrawn by the owners of limited companies (shareholders) and can be a tax efficient source of income.
Why are dividends good to pay?
If you are a director and shareholder of your company then the most tax efficient structure of taking monies from the company is by way of a salary and dividend mixture.
Assuming the company is outside IR35 conditions, a minimum salary and a dividend top-up is the best tax efficient structure.
Currently, in the tax year ended 5th April 2019, standard UK taxpayers will receive a £2,000 tax free allowance on dividend income, in addition to the £11,850 personal allowance. This effectively means that a limited company can pay a sole director, £13,850 in salary and dividends before incurring any tax liability.
After this, dividends will be taxed at the basic rate of 7.5% up to the higher rate threshold of £46,350. Dividends paid above this will be taxed at the higher rate of 32.5% and 38.1% for additional rate taxpayers (income over £150,000).
This does not account for additional income, so if you have any please discuss with your accountant and they will advise.
For the previous tax year, ended 5th April 2018, standard UK taxpayers received a £5,000 tax free allowance on dividend income, in addition to the £11,500 personal allowance. This effectively meant that a limited company could have paid a sole director, £16,500 in salary and dividends before incurring any tax liability. Dividends above that were taxed at the basic rate of 7.5% up to the higher rate threshold of £45,000.
For the tax year ended 5th April 2020, changes have yet to be announced. Any updates will be announced in the Autumn Statement 2018, expected in late November 2018.
Care is needed when taking dividends
There are a few conditions the company must adhere to when paying a dividend:
- The dividend must be declared by way of director minutes and dividend vouchers.
- Only the company's profit reserve can be taken as dividend e.g. this is the profit left over after all costs and taxes are taken into account.
- Previous year profits and losses are taken into account. This means that even if the company has made a profit in the current year but losses in previous years, the dividend may still not be legal.
The online portal can provide you with copies of dividend vouchers.
When should you pay dividends?
Your limited company can pay dividends however often you like, as long as there is sufficient reserves (income, less expenses and tax). Therefore, before you pay out a dividend, always check with your accountant or check the Dashboard on the portal, as this will give you a good indication of what you can take.
But there is money in the account?
Even if there is money in the company bank account, it does not mean that this money is available for the shareholders to take.
As mentioned, money must be accounted to pay VAT, PAYE and Corporation Tax. You may also not have paid all trade creditors from the cash reserves either.