Dividends are, put simply, payments made to company shareholders from the profits of a company after corporation tax. For freelancers, this means by operating as a Limited Company you’re giving yourself the option of extracting money from your company via dividends. Many freelancers combine dividend payments with a salary in order to operate their business in the most tax-efficient way possible (see our take home pay calculator to figure out if you could benefit).

Fueling this tax efficiency is the fact that there’s no need to pay personal NI contributions on dividends, meaning you keep more of your earnings than by taking a basic salary. While you won’t be liable to make NI contributions, you may still face forking out a degree of tax on your dividend income, exactly what you’ll need to pay altering with your earnings.

Here’s an overview of how it all breaks down –

Lower rate taxpayers (those earning up to £32,010 per year)

If you’re within this bracket, then you’ll be paying nothing. Nada. That’s as the tax liability currently lies at 10%, the same as the dividend tax credit on offer from HMRC. Thanks to this, if you’re currently within lower rate tax band you’ll face paying no further tax on your dividend income.

Higher rate taxpayers (£32,011 – £150,000 per year)

If you’re sitting within this band you’ll pay an effective tax rate of 25% on your dividend income, tax credit again reducing the amount you’ll pay from 32.5%.

Additional rate taxpayers (£150,00 per year or more)

Finally, if you’re within this bracket I’m jealous, but I’ll take solace in the fact that HMRC will take an effective tax rate of 31.1% from any dividend income, tax credit once again coming into play and reducing it from 37.5%.

Whilst some of these figures may seem high, as mentioned earlier it often works out more tax efficient to pay yourself via combination of dividends and a low salary. However, HMRC will soon pick up if you’re abusing the system, so chat to your accountant to ensure you’re getting the balance right between salary and dividend payments.