Do I pay tax on dividends from my limited company

Understanding dividend payments and tax

Receiving dividends from your limited company as part of your director pay, along with a modest salary through PAYE, could be the most tax-effective method of taking money out of your business.

The firm isn’t obligated to cover employer National Insurance Contributions (NICs), and you’re not required to pay employee NICs on dividends. However, you are responsible for paying tax on the dividends you receive from your company. 

How do dividend payments function, and what amount of tax will you have to pay?

How can you take dividends from your company? 

The company needs to possess enough distributable current-year profits, and/or profits retained from previous years, to back dividend payouts. 

These profits come after the corporation tax has been settled. Extracting dividends when there aren’t enough profits for this purpose is prohibited and considered an unlawful dividend payment.

To ensure the legality of the dividend payment, it’s important to hold a directors’ meeting. Keeping minutes of the meeting aids in the decision-making process to establish the legitimacy of declaring the dividend. Additionally, you must issue a dividend voucher.

What is the Tax Rate on Dividends from Your Limited Company?

The tax you owe on your dividend earnings – those surpassing your tax-free allowances – varies according to your income tax bracket.

In the tax year 2022-23, the dividend tax rates are:

Basic rate 8.75%
Higher rate 33.75%
Additional rate 39.35%

Paying your dividend tax through self-assessment

If you’re already submitting a self-assessment tax return as a company director, you must include your dividend income in it. You should document the entire dividend income, regardless of whether it’s from your own company or another company where you hold shares.

Every individual has a dividend tax-free allowance (for 2022-23, it’s £2,000) as well as a personal tax-free allowance. Once you exceed these thresholds, any additional dividends are subject to tax at the rates mentioned earlier.

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Is the dividend taxation is lower than your income tax? 

Yes, the dividend tax rate is lower compared to the income tax rate, making it a tax-efficient form of remuneration for company directors. However, it’s crucial to ensure the dividends you declare are lawful. Continuously taking dividends beyond what the company can afford can quickly push the company towards insolvency.

For additional details on dividend taxation and the legality of dividends, please contact Vanguard Insolvency. We provide free, same-day consultations and have an extensive network of offices across the county, ensuring you’re never far from professional support.

Senior Partner at Vanguard Insolvency Practitioners | Website | + posts

I am an insolvency professional with a distinguished career specialising in commercial insolvency, adeptly navigating Creditors Voluntary Liquidation, Company Voluntary Arrangements, and Company Administrations. With a comprehensive understanding of insolvency laws and an unwavering commitment to ethical practices.