Dividend payments could be perplexing as they are taxed at a different rate than your other income. In this article, we will define dividends, explain who is eligible to claim them, and what you need to understand about dividend tax.
What is a dividend?
Dividends are a tax-efficient way to withdraw funds from a limited company. After subtracting the amount owed for Corporation Tax, the company can pay dividends to shareholders out of the earnings that are left over. Dividends given out cannot exceed the company’s profit reserves. We work extensively with our clients with dividend planning to ensure they are able to draw funds from their company in the most tax efficient way. In many circumstances, a mixture of a salary and dividends are the most attractive option for company director/ shareholders. The amounts set depend on a tax payer’s personal circumstances and planning this correctly is crucial in saving tax!.
Who can receive a dividend payment?
Anyone who holds a share in the company is eligible to receive a dividend payment depending on the number and type of shares they own. Shareholders might be investors in the firm, but they can also be employees, directors, or relatives of the company’s owners. There are options to set up different types of shares. This allows the Board of Directors to decide which group of shareholders will get a dividend in a particular year. Please contact us for more information on this.
Directors on the other hand frequently pay themselves a small salary as well as dividends as discussed above..
How much tax will I pay on my dividends?
The amount of tax you pay on dividends is determined by your overall income and the percentage of that income that comes from dividend payments. The good news is that your dividend distributions will not be subject to National Insurance contributions. Please refer to the table below for the rate of dividend tax for the tax year 2022/23.
Tax allowances and dividend income
You do not pay tax on any dividend income that falls within your Personal Allowance (the amount of income you can earn each year without paying tax). You also get a dividend allowance each year. You only pay tax on any dividend income above the dividend allowance. You do not pay tax on dividends from shares in an ISA .The 2022/23 Personal Allowance
The tax-free Personal Allowance is the amount of money you can earn before you have to start paying income tax.
- The tax-free Personal Allowance in 2022/23 is £12,570.
If your dividends fall under your Personal Allowance, you won’t have to pay any tax on them – as long as you don’t have any other income sources.
The 2022/23 Dividend Allowance
There is a tax-free allowance for dividend income, above the Personal Allowance. This means you could earn up to £12,570, plus the dividend allowance of £2,000, receiving £14,570 in dividends before paying tax. Please note, this is on the assumption that there is no other income as salaries are taxed before dividends.
- The tax-free dividend allowance in 2022/23 is £2,000.
How much is dividend tax in 2022/23?
After combining your total dividend income to any other income you receive, the rate of dividend tax you pay is determined by the tax band you fall into. Because tax is calculated in bands (similar to a stack of bricks), you may pay various tax rates in each band. The tax bands for 2021/22 and 2022/23 are shown below, together with the rate of dividend tax you will pay in each band for that year.
To figure out which band you’re in, tally up all of your earnings for the year (including dividends). Because of the increased Health & Social Care Levy, the dividend tax rate for 2022/23 is greater than 2021/22.
2022/23 Dividend Tax Rates and Thresholds
| Thresholds 2022/23 | Dividend Tax Rate 2022/23 | |
| Personal Allowance: no tax paid on income in this band. | £0 – £12,570 | 0% |
| Basic-rate tax payers | £12,571 – £50,270 | Dividends earned over the dividend allowance are taxed at 8.75%. |
| Higher-rate taxpayers | £50,271 – £150,000 | 33.75% |
| Additional-rate taxpayers | £150,001 upwards | 39.35% |
2021/22 Dividend Tax Rates and Thresholds
| Thresholds 2021/22 | Dividend Tax Rate 2021/22 | |
| Personal Allowance: no tax paid on income in this band. | £0 – £12,570 | 0% |
| Basic-rate tax payers | £12,571 – £50,270 | Dividends earned over the dividend allowance are taxed at 7.5%. |
| Higher-rate taxpayers | £50,271 – £150,000 | 32.5% |
| Additional-rate taxpayers | £150,001 upwards | 38.1% |
When and how to pay dividends to myself?
You can pay dividends as often as you want as long as you follow the rules. Even if you’re the sole shareholder/ director, you must hold a directors’ meeting to declare the dividends every time you pay one.
You will also need to keep meeting minutes. You’ll need to create a dividend voucher containing the date, company name, shareholder names, and dividend amount for each dividend payment. Use our free dividend voucher and director’s minutes templates. The majority of firms pay quarterly dividends; however, some choose to pay bi-annually or annually. We provide the complete documents required for declaring dividends as part of our annual company accountancy fees.
Should I take a salary or dividends?
If you are both a director and a shareholder of a limited company, the most tax-efficient way to draw money from the company is to pay yourself a salary and dividends.
There is no minimum compensation requirement for directors, so you can pay yourself as much or as little as you like. If this is your only source of income, the most effective technique is to pay yourself a salary up to the National Insurance threshold and then pay any excess as a dividend.
To find out more, please contact ProtiQ Chartered Accountants on 01582 797320.
