Dividends are payments made to shareholders from a company's profits after it has paid Corporation Tax. They represent a portion of the earnings decided by the company's board of directors to be distributed among shareholders. Dividends are a common way for shareholders to receive a return on their investment in a company.
Eligibility for Receiving Dividends
- Limited Companies: Only shareholders of limited companies are eligible to receive dividends. Sole traders cannot withdraw dividends as they are not separate legal entities from their businesses.
Declaring Dividends
- Profit Requirement: Dividends can only be paid out of a company's profits. The decision to distribute dividends and the amount to be distributed are made by the company's directors.
- After Tax: Dividends are paid after the company has settled its corporation tax and VAT obligations, making them a tax-efficient method of income extraction.
Taxation of Dividends
Dividends are subject to different tax rates compared to other types of income. The rates for the 2022/23 tax year are as follows:
- Personal Allowance: Income up to £12,570 is tax-free.
- Basic Rate: Income between £12,571 and £50,270 is taxed at 8.75%.
- Higher Rate: Income between £50,271 and £125,140 is taxed at 33.75%.
- Additional Rate: Income above £125,140 is taxed at 39.35%.
Key Points to Remember
- No National Insurance: Dividends do not attract National Insurance contributions.
- Tax-free ISA Dividends: Dividends from Stocks & Shares ISA accounts are entirely tax-free.
- Dividend Allowance: The first £1,000 of dividend income is tax-free under the Dividend Allowance.
Paying Tax on Dividends
The method of paying tax on dividends depends on the amount received:
- £1,000 to £10,000: Options include filing a Self Assessment tax return or adjusting your PAYE tax code.
- Above £10,000: A Self Assessment tax return is required.
Calculating Dividend Tax
To calculate your potential tax liability from dividends, consider using a dividend tax calculator. This can provide a clear understanding of what you might owe based on your total income and the dividend income received.
Conclusion
Dividends offer a tax-efficient way for shareholders to receive income from their investments in limited companies. Understanding the tax obligations and available allowances can help shareholders manage their tax liabilities effectively. Always consider consulting with a tax professional or using HMRC resources to ensure compliance and optimize your tax position.
