As a company director of a profitable limited company, you will want to strike a balance in investing profit back into your business and taking funds out for personal use, all the while ensuring you do so in a tax efficient manner that works for you. It is possible to take a salary and/or dividends from your company in a tax efficient manner for personal use.
You have two options to extract profit from your business for personal use – either through a salary and/or dividends. The dividend option is the most tax efficient option of the two and in this article we share an overview of how dividends work and how you can use them to your advantage without disruption to your profitable business.
What are dividends?
Dividends are an alternative option to a salary allowing a company director with a profitable limited company to extract profit left after all business’ expenses are paid, including liabilities and company taxes. The net profit can thereafter be distributed to shareholders of the business, and/or invested back into the business. It is possible to pay yourself a salary and dividends, but we would heed that the tax implications should be considered, and we would advise talking to an accountancy company such as Mirandus Accountants for tailored advice.
How do dividends work?
As a company director of a limited company you are eligible to an annual dividend allowance, and this allowance represents the most you can take from your business in a year. Some shareholders draw a salary and top up the remainder with dividends. The main reason for this is that there is a certain threshold you can pay yourself a salary, known as the NIC Primary Threshold which is set at £8,632 for the current tax year where you do not have to pay National Insurance Contributions (NICs). If you require a further top-up, you can do so by paying yourself dividends. You can read more about the optimum level of salary to enjoy paying the least amount of tax here.
Setting up dividend payments
If you decide that this is the best course of action for you, the process of setting up dividend payments involves firstly the requirement to hold a minuted meeting with all company directors, or owners, of the company. The meeting still needs to be held and minuted even if you are the sole owner or shareholder of your company. You will need to include the date of the meeting, the amount of dividends to be paid out in monetary amount, and all shareholder attendees present, and any other business discussed.
Thereafter a dividend voucher should be created, which mirrors a receipt of payment, and should be given to the shareholder(s) to confirm the amount of dividends paid. The dividend voucher is a record of the transaction, along with the minutes of the shareholder meeting, and a record should be kept of both.
What shall I include in the dividend voucher?
There is a prescribed format for producing a dividend voucher so we suggest you follow the below guidelines to the script when creating a dividend voucher, also known as a dividend declaration:
- Limited company full legal name
- Full name and address of the shareholder(s)
- Confirmation of current ownership structure of shareholder(s), shown as a number or percentage of shares owned by each shareholder or director of the company
- The amount of tax credit
- The Dividend amount paid, in monetary amount
- Date and signature(s) of company director(s) or shareholder(s)
It is worth noting that if there is more than one shareholder or company director, the dividend distributions will be paid according to the percentage ownership they each have in the company.
Dividends can be paid whenever you wish as long as there are net profits in the business, after all business expenses are paid including taxes and liabilities. The dividend payment monetary amount is also totally up to you decide as long is it within the tax-free annual dividend allowance, otherwise you will start to be charged tax as detailed below.
Tax implications – the Dividend Allowance
You only need to pay tax on pay out of dividends if you go above the annual tax free dividend allowance (DA), which is detailed below for the current 2019/20 tax year:
- Basic rate tax payer – DA amount from £2,000 to £37,500 – anything over is taxed at 7.5%
- Higher rate tax payer – DA amount from £37,501 to £150,000 – anything above is taxed at 32.5%
- Additional rate tax payer – DA amount from £150,00 plus – anything above is taxed at 38.1%
Anything else I need to know?
You must be outwith the IR35 or Off-Payroll rules to be allowed to pay yourself dividend payments. You can read more on the IR35 rules here. If you do fall within the IR35 rules, you still have the option to pay yourself a salary.
How should I pay myself?
Often there is a requirement for forward tax planning to take full advantage of the tax reliefs available to you and your business including taking an income from your company, or if you do so already, you may want to review what level of income works best for you. We strongly recommend you speak with a tax and accounting specialist like Southside Accountants. Please contact us to see how we an accountant can help you run your business effectively.
As small business advisory accountants in London, we understand how difficult it can be to take full advantage of the benefits of a limited company structure.
Southside Accountants provide accountant services, including tax return services, to small businesses in the UK.
Written by Shaima Todd.