If you have recently started trading through a limited company, you have likely come across references to dividends. You might not, however, have come across a definition and explanation of how they work in your company. This blog provides a clear guide to dividends.
If you run your own company, you likely have three different roles in the business:-
- Company director
As an employee, you are probably paid a basic salary every month (or week), and you or your accountant operate a payroll system and file returns with the Revenue.
Dividends are company’s profits that are distributed to its shareholders. You must make sure there are sufficinent post-tax profits in your company to cover the amount of dividends withdrawn as a shareholder of your company.This does not just mean that there’s enough money in the bank: you will need to take account of assets and liabilities in the company, including how much corporation tax is accruing. Southside Accountants in Wimbledon can help you calculate this.
Dividends are a different type of income to your salary and are also taxed in a different way. (Though if your company works for one customer as if it is an employee, you might pay tax on dividends as if they were salary payments under “IR35” rules.) Dividends come with a 10% tax credit. This is best explained using an example.
If the shareholder/owner of a company takes a £9,000 dividend, the gross dividend is £10,000. £1,000 is tax, viewed as being deducted by the company before paying the shareholder/owner the £9,000 net dividend.
The gross amount (£10,000 in the above example) is shown on your tax return as income. Providing you are a basic rate tax payer, you will not pay any further tax on the receipt of dividends.
While 10% tax is payable on dividends, this has already been paid using the 10% notional tax credit. This 10% tax credit might sound rather fabricated: after all, the Revenue were not paid any tax when the dividend was paid. Bear in mind that the company had to pay 20% corporation tax before paying dividends, so this corporation tax effectively included the 10% dividend tax credit.
If you are a higher rate tax payer, you will pay extra income tax of 25% of the net dividend you receive. Still using our above example of a £9,000 dividend payment, if this whole dividend is to be taxed at the higher rate, tax of £2,250 will be due.
We hope this blog post has helped explain the basics of dividends. Please feel free to get in touch with any further queries you may have.