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How do dividends work?

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What is a dividend?

A dividend is a payment to the shareholders of a company (who may or may not also be the company's directors) from the after-tax profits earned either during the current accounting period or retained within the company from previous accounting periods. Sufficient profits must be available to declare a dividend.

 

The amount each shareholder receives will depend on their percentage ownership of the company. For example, if a company has £20,000 of retained profits and the directors have chosen to pay the full £20,000 as dividends, if there are two shareholders who own 50% of the company each, each shareholder will received £10,000.

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How much tax will I pay on my dividends?

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Shareholders usually need to pay dividend tax on the dividend payments they receive. The amount of tax you pay on your dividends depends on your total income, and how much of that income is specifically from dividend payments.

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You have a £12,570 (24/25) income tax, tax-free allowance. If you have not already fully utilised your tax-free allowance against other income, the remaining portion of your allowance can be utilised against your dividend income. In addition to any unused portion of your income tax, tax-free allowance, you have a £500 (24/25) dividend tax-free allowance.

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Dividends are then taxed at 8.75% to £50,270 then 33.75% to £125,140 and 39.35% thereafter.

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Shareholders are responsible for declaring dividends received to HMRC as personal income. If you earned total dividends of less than £10,000 during the personal tax year to 5 April, you can declare your dividends to HMRC over the phone (call 0300 200 3310) avoiding the need to file a personal tax return. If you earned dividends over £10,000, you must file a personal tax return to declare the dividends to HMRC.

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How much dividends should I pay myself?

Once we have finalised your accounts we will be able to advise you exactly how much retained after-tax profits are available to be paid as dividends.

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For director owned companies, it's usually beneficial to extract annual profits as dividends immediately rather than retaining the profits within the company to be extracted in a future year. This is because you will utilise your annual tax-free allowances and lower income tax brackets. If your company needs to retain the funds for investment purposes, a director's loan can be made to the company. The loaned funds can be withdrawn anytime in the future tax-free.

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It's important to avoid an overdrawn Director's Loan Account (DLA). Please click the link below to learn more.