Dividends

Here we explain what needs to be done about Dividend Tax.

What you need to do with Dividends?

A question that often gets asked is what are the legitimate ways you can take money out of a company, for personal use?

Setting yourself up an employee and then paying yourself a salary through payroll is one way. If your income in a year is more than your tax free personal allowance – you will start to pay tax on your salary, above this threshold, at a marginal rate of 20%.

But setting yourself up as a shareholder and then paying yourself a dividend from the company’s profits can be another way. In fact, receiving income as a dividend can, in many situations, actually be more tax efficient than paying yourself a salary. This is one of the major benefits enjoyed by those working through their own company!

As of the time of writing, the dividend rates start at 7.5%, compared to a much higher salary income tax of 20%.

What to watch out for?

HMRC and UK Company Law have very strict rules around how much you can pay yourself in dividends. For example:

1. Dividends can only be paid from the company’s profits (if it makes a profit!)
2. You cannot pay out more in dividends than available profits from current and previous financial years
3. Before a dividend can be approved and paid, you have to arrange and conduct a company meeting, to complete the necessary paperwork (we touch upon this below).

The general rule of thumb is that if you have enough retained earnings, you should be ok to pay dividends.

Meetings and Dividend paper work

The process of paying yourself a dividend does carry with it some extra administrative tasks. But, if there is enough money in the company, it is definitely a route you can take to paying less tax!

To pay a dividend, you need to:

• Hold a directors’ meeting to ‘declare’ the dividend
• Keep Minutes of the meeting to ‘declare’ the dividend – even if you’re the only director
• Complete the necessary paperwork – e.g. a Dividend Voucher, showing:
  • The Date of Payment
  • Company Name
  • Names of Shareholders being paid
  • Amount of Dividend

Records you will need to keep

Tax Document 3:

• Dividend Voucher

Tax Document 4:

• Dividend Minutes

More Information

More information on how you can withdraw money from a company as a dividend, can be found on the Government’s own website, here:

» GOV.UK - Dividends