Knowledge

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

Posted on Feb 28th, 2018 | Tax

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 is 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. You can check out our article, “How much should I take as a salary?“, for further guidance, and our take home pay calculator to figure out if you could benefit.

Fuelling 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 total, dividends are added on top of this.

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

Tax year 2017/18 Tax year 2018/19 Tax rate
Personal allowance £11,500 £11,850 0%
Tax free allowance for dividends £5,000 £2,000 0%
Basic rate dividends1 Up to £28,500 per year Up to £32,500 per year 7.5%

1Excluding personal allowance

If you’re within this bracket, 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 2017/18 Tax year 2018/19 Tax rate
£33,5011 – £150,000 £34,5011 – £150,000 32.5%

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

Location Tax year 2017/18 Tax year 2018/19
England and Wales Over £150,000 per year Over £150,000 per year
Scotland Over £150,000 per year Over £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.

Worked examples

Basic rate of tax example for 2018-19:

Salary £8,424
Dividends £33,500
Total income £41,924
Personal allowance (£11,850)
Taxable income £30,074
Dividend Allowance 2,000)
Dividends taxable @ 7.5% £28,074
Income tax due £2,105.55

 

Higher rate example for 2018-19:

Salary £8,424
Dividends £60,000
Total income £68,424
Personal allowance (£11,850)
Taxable income £56,574
Dividends Allowance / Income Tax due 2,000) / £0
Dividends taxable @ 7.5% / Income Tax due £32,500 / £2,437.50
Dividends taxable @ 32.5% / Income Tax due £22,074 / £7,174.05
Total Income Tax due £9,611.55

Note: These examples are dependant on taking a salary up to the National Insurance threshold (£8,424). If you take more than this and want more information about planning personal tax liabilities, please get in touch.

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