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Dividends – What Are They and What Taxes Do I Pay on Them?

Dividends are, put simply, payments made to company shareholders from the profits of a company after corporation tax. This means that by operating your business as a limited company the main way of extracting money from your company via dividends.

Many limited company owners 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 National Insurance (NI) contributions on dividends, meaning you get to keep more of your earnings than by taking the same income as a basic salary.

Depending on how much you take in dividends, your other income, and any benefits in kind, you may still have to pay some tax on your dividend income. It’s important to remember that dividends are taxed personally and need to be reported to HMRC on your self assessment.

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

Basic rate taxpayers

First you need to total up all of your income which isn’t dividends. This will include salaries, rental income, sole trade profits and interest. Once you have this tota, dividends are added on top of this.

The following table show the rates that apply to dividends once total other income is calculated.

Tax year 2017/18Tax year 2018/19Tax rate
Personal allowance£11,500£11,8500%
Tax free allowance for dividends£5,000£2,0000%
Basic rate dividends1Up to £28,500 per yearUp to £32,500 per year7.5%

If you’re within this bracket, then you’ll be paying tax at 7.5% once your personal allowance and dividend allowance is used up. This means the maximum amount of tax to pay as a basic rate taxpayer is £2,137.50 in 2017/18 and £2,437.50 in 2018/19.

Higher rate taxpayers

Tax year 2017/18Tax year 2018/19Tax rate
£33,5011 – £150,000£34,5011 – £150,00032.5%

1Excluding personal allowance

If you’re sitting within this band you’ll pay a tax rate of 32.5% on your dividend income.

Additional rate taxpayers

LocationTax year 2017/18Tax year 2018/19
England and WalesOver £150,000 per yearOver £150,000 per year
ScotlandOver £150,000 per yearOver £150,000 per year

Finally, if you’re within this bracket I’m jealous, but I’ll take solace in the fact that HMRC will take tax at 38.1%.

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.

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