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Definition of a dividend: a sum of money that a limited company pays out to someone who owns shares in the company (e.g. a shareholder).
As an employee pondering a switch to a starting their own business, it’s important to understand the use of dividends as a means of taking your reward.
PayStream has put together some of the questions that are frequently asked about dividends. We’ll look at some of the queries about the nature of dividends, how they are treated for tax purposes and the process of working out and declaring dividends. We hope that the answers we provide are useful to you.
When a company makes a profit it commonly rewards those who have invested in it (its shareholders) by declaring a dividend. This is cash paid out according to the amount each shareholder has invested.
For large companies this may be a modest few pence per share to thousands of shareholders. In the case of smaller companies the dividend is usually only payable to one or two shareholders and it can be significant.
Unless your company has large reserves of undistributed profits for earlier years, dividends should not exceed the year’s profits (profit means the amount left over after paying expenses, liabilities and taxes of the company).
So, if the company makes a profit of £50,000 for a year, has two shareholders each with one share, then the company could declare a dividend of £25,000 per share which could be paid to each of the shareholders.
They can only be paid a dividend if they are a registered shareholder. If your partner is not a shareholder then depending upon the duties they carry out, they could be paid a bonus but this would be subject to PAYE and National Insurance in the same way as any salary which is paid.
Not directly because it will already have been charged Corporation Tax on the profits out of which the dividends are paid.
Yes. Most clients working through their own limited company pay themselves a combination of salary with the balance of their reward coming through dividends.
No, and your limited company does not have to account for employer’s National Insurance Contributions on dividends either.
As an individual you get a dividend allowance (for the 2023/24 tax year which ends in April 2024) of £1,000, meaning that you only need to pay income tax on any dividends above that amount.
If you are a basic rate taxpayer, you pay tax at 8.75% on the dividends you receive between £2,000 and £37,700*
If you are a higher rate taxpayer, you pay tax at 33.75% on dividends you receive between £37,701 and £150,000*
If you are an additional rate taxpayer, you pay tax at 39.35% on dividends you receive over £150,000*
*You are entitled to a Personal Allowance (£12,570 for 2022/23) which will normally be set first against your earned income. Dividend income is always treated as being the top slice of your income if you have income from other sources like earnings and rents.
Here are the comparable tax rates on salary (on all earnings including commission, bonuses and benefits) for the current tax year ending in April 2024:
First £12,570 of salary – covered by annual Personal Allowance – Tax Rate 0%
Taxable earnings between £12,501 and £50,270 – Basic Rate – 20%
Taxable earnings between £50,271 and £150,000 - Higher Rate – 40%
Taxable earnings over £150,000 - Additional Rate – 45%
(NB - the rates shown above are based on the tax rates applicable to England, Wales and Northern Ireland. Scottish rates are slightly different).
No. This would constitute an illegal dividend and would have to be repaid.
This will depend upon the rights of each share type in your company. As the founder of your company, you can determine what rights each share type carries. Not every share type has to have a right to receive a dividend.
For example, a company can have 1 x A share and 1 x B share but the company may only need to pay dividends to say, the owner of the A share.
Also, the directors may decide at the meeting of the company, for example that a dividend will only be payable to the holder of a B share.
However, most small company shares normally carry equal rights and the dividends are apportioned across the share classes equally and in proportion to the number of shares held by each shareholder.
Dividends can be paid at any time providing that there are available profits.
Dividends are reported to HMRC as part of the annual filing of Corporation Tax Returns and Accounts. You need to ensure that you report any dividends which you receive as an individual via your Self Assessment Tax Return if you are required to make one. You need to notify HMRC about your dividends if you don’t make a Tax Return but receiving those dividends produces a tax liability for you.
The first step in declaring a dividend is to call a meeting of the company’s members. Directors normally propose what dividend should be declared at this meeting. Minutes of the meeting should be taken as a record of what was agreed. This process is followed even if you are the single director/shareholder.
Once the dividend has been declared a voucher with details of the date and amount of the dividend is prepared and given to the shareholder with payment being arranged in accordance with the voucher.
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