You may or may not heard about dividends but they represent director or business owner withdrawals from the business. Directors extracting money from their business through dividends is usually more tax-efficient than a director salary as directors make no national insurance contribution on dividend income.
Many limited company owners combine dividend payments with a low salary to operate their business and their personal finances tax-efficiently. Let us take a look at the most tax efficient income withdrawal of up to the basic rate i.e. £50,000
|Income||Income Type||Income Tax Rate||Tax to pay|
|First £8,788||Salary||Personal Allowance||£0|
|Next £3,712||Dividends||Personal Allowance||£0|
|Next £2,000||Dividends||Dividend Allowance||£0|
|Next £35,500||Dividends||Basic Rate of Dividend Tax 7.5%||£2,662.50|
The total income tax on £50,000 would be £2662.50.
A further information is available on Gov.UK
Frequently Asked Questions
Do I need to keep any record for the dividend I take from my business?
Yes, you are required to keep an audit trail of any dividend you take from your business. The best audit trail involves preparing a voucher capturing the following information:
- date the dividend is paid
- company name
- names of the shareholders being paid a dividend
- amount of the dividend
Is dividend an allowable business expense?
No, the dividend is not an allowable expense for calculating the profit of your business. The dividend is taken on the excess profit left in the business following the payment corporation tax by your business.
Would my company pay taxes on the dividend I take?
No, your business does not pay any tax on the dividend. The dividend income assessed under the income tax as part of the self assessment return.
What are the personal tax rates on dividend income?
There are three different rate of taxes;
- Basic rate @ 7.5%
- Higher rate @ 32.5%
- Additional rate @ 38.1%
Essentially, the dividends up to £50k are taxed using the basic rate of 7.5%. The first £2000 dividends along with the any un-taxed element of your personal allowance fall within the nil band.
Can a sole trader take a dividend from his/her business?
No, the dividend is only relevant to the company director who operate through a Ltd company