In simple terms, a dividend is a payment made to shareholders of a company from post-tax profits. The amount of dividend to be paid is decided by the Board of Directors and dividend tax certificates are issued to the recipients. In the UK a dividend cannot legally be declared where the business has made a loss or has insufficient reserves on the balance sheet.
How Do Directors Use Dividends to Pay Themselves?
In the UK individuals who work for themselves often form a Limited Company, setting themselves up as sole Director and shareholder. They pay themselves through a combination of PAYE salary and dividend to benefit from bigger tax savings than registering as self-employed.
By structuring how they pay themselves from their Limited Company they take advantage of dividend tax rates starting at 8.75% and corporation tax at 19% once their personal allowance runs out, instead of income tax rates starting at 20%.
Are Dividends Taxable?
Dividends are a form of taxable income in the UK and are subject to dividend tax. That means, in most cases, they need to be reported on a self-assessment tax return and tax paid on them. The amount of tax due will come down to the recipient’s total income, the amount of dividend received and tax-free allowances available.
Read this guide on UK dividend tax rates to find out the latest rates and dividend tax allowances in place for 2022-23 as well as how to tell HMRC about them.
Related:
- Is it Worth Setting Up a Limited Company?
- How to Pay Yourself as a Director from a Limited Company
- Sole Trader vs Limited Company? What’s Better?
Friendly Disclaimer: Whilst I am an accountant, I’m not your accountant. The information in this article is legally correct but it is for guidance and information purposes only. Everyone’s situation is different and unique so you’ll need to use your own best judgement when applying the advice that I give to your situation. If you are unsure or have a question be sure to contact a qualified professional because mistakes can result in penalties.