If you own shares in a company you may get paid a share of the profits, as a dividend. Your
company will not need to pay tax on dividend payments and so any tax payable is your
responsibility as shareholder. You can earn a certain amount of dividend income each year
without paying any tax. Tax calculations and dividend income can become a tricky topic to
understand and so we have answered the most frequently asked questions surrounding
dividend tax below.
What is a dividend and how often are they paid?
A dividend is a payment that is distributed to company shareholders when the company has made and retained sufficient profit after all business expenses and liabilities, and is based on how many shares you own. Companies can distribute dividends at any time, however they are typically paid monthly or quarterly. Your company must ensure that there are sufficient distributable profits and ensure there is a clear record and audit trail. If you are director of a limited company you can take a dividend payment whenever you like, the same applies.
How do I take a dividend as company director?
It is highly recommended to enlist an accountant if you are thinking about dividends. Your
dividend could be illegal if you are not following the correct rules, you distribute a payment
that is higher than available or your paperwork is wrong. Don’t take the risk, let your
accountant take the lead.
How much will I receive in dividends?
Payment is distributed according to the percentage of company shares that you hold. For
example, if you own 10% of the company's shares, you will receive 10% of the dividend
distribution. If the dividend distribution is £1000 and you hold a 10% share, your
dividend payment would be £100.
Do I pay tax on dividends?
Tax is something that is confusing to a lot of people, and can be extremely daunting but it is
vital that you understand this if you are receiving dividends. With a normal salary, a company must take Income Tax and National Insurance Contributions and pay these to HM Revenue and Customs. Dividends do not count as a business cost and the tax isn't paid by your company. It is income tax that you need to pay yourself, through self-assessment.
How are dividends taxed?
You have a dividend allowance each year (i.e funds that are tax free). You must pay tax on
dividends over that amount. For the 2020-2021 tax year the dividend allowance remains at
£2000. Depending on the income tax band that you fall in depends on how much tax you pay on dividend income.
Dividend Tax Rates:
Basic Rate = 7.5%
Higher Rate = 32.5%
Additional Rate = 38.1%
You also have a personal allowance (the amount of income you can earn each year without
paying any tax) that you must take into account. This is because you do not need to pay tax
on any dividend income that falls within this allowance. For the 2020-2021 tax year personal
allowance is £12,500 .
You can find some helpful examples on the gov.uk website and your accountant can assist you with your calculations.
How do I pay tax on dividends?
This depends on how much you earn as dividend income. If you earn:
Up to £10,000 - If you already pay tax through PAYE then you will need to contact HMRC to
change your PAYE code so that they can collect your dividend tax. Alternatively you will fill in a self-assessment and fill in the ‘Dividends’ section.
Above £10,000 - You will need to fill in a self-assessment and fill in the ‘Dividends’ section.
Anything else that I need to know?
YES! The rules on dividend tax are different pre 2016 so please seek professional advice to
ensure that you are complying with the correct tax regulations. The process will run a LOT
smoother with an accountant by your side to give you the correct tips and advice. Contact
Sigma Chartered Accountancy to avoid the stress, there's no need to panic! We are here to
help you remain cool, calm, collected and in control.
Email us: Info@SigmaCharteredAccountancy.co.uk
Phone us for a chat on: 07478714868
Subscribe to our blog for more tips!