What you need to know about dividends and dividend tax rates
For many self-employed professionals who work through their own Limited company, paying themselves via basic salary plus dividends can be a more tax efficient option.
What is a dividend?
- A dividend is the distribution of a company’s profits to its shareholders.
- Paying dividends can be done by a company of any size.
- A dividend is paid using the money that’s left over after wages, tax and all other business expenses are paid.
- Dividends have to paid to ALL shareholders.
- Dividends can only be paid if the company has made a profit after tax.
- The dividends paid out cannot exceed the company’s available profits.
- The amount of shares a person owns in a company, usually determines the percentage of shares they are given. For example, if you own 30% of the company’s shares, you should receive 30% of each dividend.
Why do self-employed people opt for dividends?
For professionals who operate their business as a Limited company, the most tax efficient way of paying yourself, as a limited company director, is often via a combination of salary and dividends. This is as an alternative to paying yourself solely through Pay As You Earn (PAYE).
Each year, you can earn some dividend income without paying tax.
Just as you receive a personal allowance on your income (the amount of income you can earn each year without paying tax), you also receive a personal allowance on dividends. This means you can receive £1,000 in dividends, in the tax year 2023 – 2024, tax free.
How do I pay myself dividends?
If you are considering paying yourself through dividends, speak with your accountant first as it’s important for all self-employed professionals to work with an accountant to ensure taxes and accounting is completed correctly.
On the GOV.UK, HMRC specify that a meeting of a company’s directors must be held to announce the dividend and the meeting minutes must be recorded. This is true even if you are the only director.
For each dividend paid, a dividend voucher needs to be created. HMRC guidelines say this must include:
- Date
- Company name
- Names of the shareholders being paid a dividend
- Amount of the dividend
A copy of the voucher should be given to all of those receiving the dividend. A copy should also be retained for company records.
Dividend tax rates
Dividend tax is an income tax that you have to pay personally, not through your company.
Everyone receives a dividend allowance each year. This means that some of the dividends you receive each year are tax free. For the tax year 2023 – 2024, the dividend allowance is £1,000.
The amount of tax you pay on dividends over this allowance depends on your Income Tax band.
|
Tax band |
Tax rate on dividends over the allowance |
|
Basic rate |
7.5% |
|
Higher rate |
32.5% |
|
Additional rate |
39.1% (this will be removed from 6 April 2023) |
When calculating your tax band, you need to add up your wage and total dividend pay for the year. Depending on your overall income (dividends and wage), you could pay tax at more than one rate.
Dividend tax rate example
To put this into context, here is an example from HMRC:
“You get £3,000 in dividends and earn £29,500 in wages in the 2020 to 2021 tax year.
This gives you a total income of £32,500.
You have a Personal Allowance of £12,500. Take this off your total income to leave a taxable income of £20,000.
This is in the basic rate tax band, so you would pay:
- 20% tax on £17,000 of wages
- no tax on £2,000 of dividends, because of the dividend allowance
- 7.5% tax on £1,000 of dividends.”
How should I pay dividend tax?
If you are earning up to £10,000 in dividends, you need to inform HMRC. You can do this by ringing their helpline on 0300 200 3300, asking them to change your tax code or by putting it in your Self-Assessment tax return.
If you are earning over £10,000 in dividends, you need to fill in a Self-Assessment tax return.
A final note on dividends…
When you are working out your Corporation Tax, remember that dividends do not count as a business cost.
For self-employed freelancers, contractors, and small business owners, dividends can be tax-efficient way of earning money. If you’re unsure of how much to distribute in dividends, it’s advisable to consult your accountant.
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