Companies pay dividends for several reasons, such as attracting and retaining investors. A dividend is a payment of profit from a limited company to its shareholders. This is the amount of money the business still has after it has covered all of its liabilities and operating costs, as well as any unpaid taxes (such as corporation tax and VAT).
While dividends are a great way to generate a regular income, like any other income you earn, you have to pay tax on dividends. So, let's understand what dividends are and how they are taxed.
What are Dividends?
Dividends are a part of a company’s profit that it pays to its shareholders. They are among the methods by which an investor might profit from a venture without having to sell their stock. Dividends can be paid monthly, quarterly, semi-annually, or yearly, depending on the amount of stock an investor holds. For instance, if you hold 100 shares and the dividend is 50p annually, you will earn GBP 50 in that year.
Dividends serve as incentives for shareholders because they provide them with assurance about the profitability of the company in which they have invested and the likelihood of future earnings.
When and How Do I Pay Myself Dividends?
As a business owner, you can pay dividends as often as you like, provided you follow the regulations. Most companies pay dividends quarterly, though some companies choose to pay either bi-annually or annually.
You will have to hold a directors’ meeting to declare dividends and record this in the meeting’s minutes. Each dividend declared would need a dividend voucher showing the company name, shareholder’s name, date, and the dividend amount.
Dividend Allowance
The dividend allowance is in addition to the personal allowance, which you earn each tax year before starting to pay tax. For the tax year 2023-24, the personal allowance is GBP 12,570. This implies that if you get GBP 13,570 in dividend income for the tax year, the personal allowance will cover the first GBP 12,570, and the remaining GBP 1,000 will be covered by the dividend allowance. So, no UK tax on dividends would be payable (presuming you receive no other income).
The personal allowance is decreased by GBP 1 for every GBP 2 of an individual's adjusted net income above GB100,000, removing the allowance in full for individuals with adjusted net income above GBP 125,140.
Do You Pay Tax on Dividends?
As a shareholder receiving a dividend, you will have to pay tax on dividends in the UK if the dividend received is above the dividend allowance. You do not pay dividend tax if the income from the dividend falls within the personal allowance. The tax on any salary income is collected via your payroll. However, if you receive dividends, you will have to declare and pay tax on them by submitting a self-assessment.
Dividend income in surplus of the allowance is charged based on the highest rate of tax; for example, if you receive dividends of GBP 20,000, after considering the individual’s personal allowance and divided allowance of GBP 1,000, then GBP 6,430 is taxable.
Tax on Dividends, UK, Rates
Depending on the tax band within which the taxpayers come, the tax rates on dividends
- The basic rate taxpayers: 75%
- The higher rate taxpayers: 33.75%,
- The additional rate taxpayers: 39.35%.
Your income tax rate for 2023/24 is
- 0% for earnings up to the tax-free personal allowance of GBP 12,570.
- From GBP 12,571 to GBP 50,270: basic rate band at 20%.
- From GBP 50,271 and GBP 125,140: higher rate tax band of 40%
- Over GBP 125,140: additional rate of 45%
How Much Dividend Tax Will I Pay?
The amount of income tax on dividends depends on the ‘yield’ generated by the investments, which are not part of tax-efficient wrappers like ISAs. This is the amount that is paid out yearly as a percentage of the share/unit price.
Different shares and collective investment funds pay different amounts to investors. Multiplying the investment value by the yield gives approximately the income that the investor can expect to receive – and gives an idea of any potential tax on dividends.
For instance, a basic rate taxpayer has GBP 10,000 in company ABCD, and its yield is 45%. The investor can expect to receive GBP 10,000 x 0.05 = GBP 500 yearly in dividend income. If the investor has already used the dividend and personal allowances elsewhere, the investor will have to pay a tax of GBP 500 x 0.0875 = GBP 43.75.
Note the investment value and the income derived from such investments can increase/decrease, implying that yield calculation only offers a rough estimation of what you can expect.
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How Unicorn Accountant Can Help You?
Dividends are a source of income, and therefore, you will have to pay tax on any that you receive. The rates of tax on dividends are different to the rate of income tax you have to pay on other types of earnings. Hence, this can make things seem a bit unclear.
At Unicorn Accountants, one of the leading accountant services in London, we will take care of and manage all your HMRC payroll and dividend paperwork, making it simple and tax-efficient for you to pay yourself. In addition to receiving all the assistance and guidance you require, your company's tax filing will be managed. We shall also take care of your yearly self assessment tax return by helping you in the preparation and filing of returns.