Taking dividends is one of the most tax efficient ways to take money from a limited company.
But what exactly are dividends and how much can you take?
What are dividends?
Dividends are the payments made to company shareholders from the business’ profits.
So, if the business has made a profit, these earnings can be distributed to shareholders as dividends. However, it’s important to remember that dividends can’t be counted as business expenses, meaning they won’t be deducted from your taxable amount for Corporation Tax.
It’s also important to note that it’s illegal to take a dividend if the company doesn’t have enough profit after tax to cover the amount.
Tax-free Dividend Allowance
In the tax years 2021/22 and 2020/21, you can earn up to £2,000 in dividends before you will be required to pay any Income Tax on your dividends. This is on top of your personal Tax Free Allowance of £12,750 in the 2021/22 tax year, and £12,500 in the 2020/21 tax year.
Dividend Tax Rates
After you’ve used the £2,000 tax-free dividends allowance, you will pay tax on any dividends from any source.
The amount of tax you pay on your dividends depends on your tax band, but the rates are lower than income tax rates. This is why taking dividends are so tax-efficient way for limited company directors.
Currently, the rates of tax of dividends are:
- Basic rate taxpayers – 7.5%
- Higher rate taxpayers – 32.5%
- Additional rate taxpayers – 38.1%
How are dividends paid?
To issue dividends, the directors of the limited company must hold a meeting and officially declare the dividends. This must be minute so there is an official record of it.
Every time a dividend is issued, the company y must issue a dividend voucher with the following information:
- The date the dividend is paid
- The name of the company
- The names of the shareholders who are being paid the dividend
- The amount of dividend being paid
Why React Accountancy?
Here at React Accountancy, we provide trusted accountancy services to start-up, established and multi-national businesses across a diverse range of industries.
From the moment you get in touch, our approachable, friendly and professional team will go above and beyond to ensure that you receive the right advice, support and accountancy solutions for your business.
All of our team has years of experience in providing accountancy services that support your business including complex financial issues.
Get in touch today for further information about any of our services.
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