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Introduction
As a UK limited company contractor, how much dividend can I take from my business? Basically, you can take your income as salary and dividends as the owner of a UK contractor limited company. Indeed, you could consider taking UK dividend or salary, however it’s usually more tax-efficient to take a combination of both. Therefore, when considering how much contractor dividends I can take from my business, you should know how to calculate limited company profit before you pay yourself a dividend. Besides the limited company dividends available from contracting company profits, it is also useful to know what is the maximum dividend available and how much dividends can I take tax-free.
When we consider how much dividends can I take or how much dividend can I take tax-free, these are common thoughts for UK contractors and business owners who run their own company. When we calculate how much dividend you can take, we’ll work out your post-tax company profit levels. As a limited company paying dividends, it’s important to bear this in mind on an ongoing basis. Therefore, before paying yourself a dividend, you can perform a company profit check for your business.
This guide is aimed at directors / shareholders of UK limited companies. If you’re a sole trader, you don’t take dividends, but rather have profits which you can draw out of. As a director of your own company, you pay contractor limited company dividend tax (UK) and your ltd company dividends are taxed at the appropriate dividend tax rate (UK) through your personal tax return each year. In this guide, we’ll consider how you can work out what is available when taking a dividend from my company. In addition, we’ll look at how dividends are taxed and the current dividend tax rate(s).
Initial thoughts
What to consider first
When you pay yourself a dividend, it is key to know your post-tax profit levels on an ongoing basis. Therefore, we need to know how to calculate limited company profit. To sum up, the amount of available profit determines how much your business can pay you in contractor dividends.
When we look at who is profit paid to in a company, they are paid to the shareholders in the business. Therefore, as a contractor with your own company, you will likely be the shareholder. As a result, when paying a dividend from a limited company, the dividends will be paid to you and any other shareholders in your business. Ordinarily, your company should also pay the shareholders in their respective share ratios. As part of paperwork for UK dividends, the company that pays this should provide the shareholder with a dividend voucher each time they pay a dividend.
Common questions
UK limited company owners and contractors will have question regarding what they can draw from their company as dividends. Therefore, some of these questions are:
- Who takes the profit of a company?
- How much dividend can a company pay?
- How much dividend can I take out of my company?
- When can you take a dividend?
- How often can I take a dividend from my limited company?
- When can a company pay a dividend?
- How to pay yourself a dividend?
- What is the dividend tax rate?
- How much tax do you pay on a dividend?
- How does the dividend allowance work?
- Is it better to pay dividends or salary?
- How much dividend can I pay myself tax-free?
- How to work out retained profit?
- When can I take a dividend?
Therefore, in this article we will consider all of the above. In addition, our main focus will be on how much can I take in dividends from my company.
UK dividends -other aspects
Before we move on, as a limited company contractor, besides considering how much dividend can I take, there are many aspects to paying yourself a dividend. Basically, considering contractor dividends explained and the different aspects of these, we have other articles:
- How much can I pay (this article)?
- The dividend allowance-how much dividend can I take tax-free?
The two methods which show how to calculate maximum dividend a company can pay
How much dividend can I take -the first maximum dividend method
What is the maximum dividend a company can pay while you are UK contracting? Before you declare a UK dividend, you can perform a company profit check. Basically, you will work out your company profit for the current financial year and then calculate limited company tax. Next, the tax will be deducted from the profit to arrive at profit after tax for the current year. From this, we can deduce what is the maximum dividend available from post-tax contracting profits. As a result, this will be the amount in your company that is available for your contractor dividends. Indeed, just like using online tax calculators, the above method can be used by limited company contractors before working out dividend payments (UK).
The actual formula
Therefore, when we look at how to calculate limited company profit you should:
- First, we take our total income, including the business turnover in the current financial year. This is the total business income for the period in question.
- Then, we deduct our business expenses in the current year.
- Next, we subtract what our business pays as my gross salary in the current fiscal year.
- In turn, this gives our profit for the company, before Corporation Tax (CT).
- Now, we deduct our company’s CT at the appropriate rate. The current Corporation Tax rates are 19% or 25%, depending on whether your company is small or large (see our Corporation Tax guide for details). We apply this tax rate to the profit before tax figure in the previous line.
- As a result, this gives me our profit after CT.
Summary
After CT, the profit in your business is a key figure to know in terms of your finances. This figure shows the amount available for a limited company contractor dividend from the current year’s profits.
The final step when we look at how to calculate limited company profit is to add your company’s retained profit (or loss) from the previous accounts period to the figure above. The retained earnings (UK) amount is the Profit and Loss account balance from the last accounts, as shown in your company’s Balance Sheet. As a result, this will show the maximum dividend available to draw from your company. Furthermore, once you know your available profit, you can go ahead and declare the UK dividend and make sure that this does not exceed the available profit level.
Besides using the above calculation for the maximum dividend allowed, you can also search online for a limited company tax calculator. Once you find one, you can input the figures and the calculator will work out the pre and post-tax profit for you.
How much dividends can I take -the second method
When considering what is the maximum dividend a company can pay, you can also calculate your company’s profit which is available for your contractor dividends, by working back from the company bank account balance(s). Limited company contractors can use this method and it will also show how much is available in your company to pay as UK dividends. Therefore, you can use the following to calculate this before you go ahead with working out dividend payments:
- First, we take our company’s current bank account balance. We add the bank account balances together if we have more than one company bank account.
- Next, we add to this any company sales invoices that we have raised that are still outstanding.
- Then, we deduct from this any company tax bills that are outstanding. We need to calculate these tax bills right up to the present day.
How much dividend can I take -the UK taxes that a contractor may pay
Company taxes
- Value Added Tax (VAT). Usually, any VAT that you owe to HM Revenue & Customs is any VAT that you have yet to declare on the next VAT return. This VAT may also include the last quarter’s VAT bill, which your company has yet to pay.
- Pay As You Earn Tax (PAYE) / National Insurance Contributions (NIC). You usually pay your company’s PAYE/NIC bill each calendar quarter or each month. Any PAYE/NIC that you now owe is generally for the latest month or last quarter.
- CT. You pay this on an annual basis. You may not have yet paid last year’s CT charge at the current time. Therefore, the CT you currently owe is the CT for your company’s current financial year and perhaps the CT for the previous year.
Personal tax
Personal tax is known as Self-Assessment (SA) and the UK tax year covers 6 April to 5 April. Therefore, the 2023/24 tax year runs from 6 April 2023 to 5 April 2024. When we consider how much I can take as a limited company tax-free dividend, we will need to consider your tax allowances. If you fall under SA every year, you must complete a Self-Assessment tax return. The actual income tax you pay is calculated based on your overall income then we deduct any income tax you have paid during the tax year.
When we consider how much dividend can I take tax-free, we will need to consider your overall income. The dividend allowance was £2,000 in 2022/23, and this is now £1,000 in 2023/24. Therefore, every tax year, you can draw this amount tax-free from your company before you pay UK dividend tax. In addition, you also have a personal allowance of £12,570. As a result, when you run your own company, you have a total of £14.570 (£2,000 + £12,570) in 2022/23 or £13,570 in 2023/24 tax-free income each tax year. Furthermore, income above this will incur contractor dividend tax.
Once you have completed your Self-Assessment tax return, any tax that is due can be paid directly to HMRC, or you can request that it is included in your tax code for the following year.
When we calculate dividend tax, this will depend on which tax band you fall into. In addition, the UK limited company dividend tax rates are set at three different levels. Therefore, when we work out dividend tax, the amount of contractor dividend tax you pay on dividend income is
- 8.75% in the basic rate band.
- 33.75% in the higher rate band.
- 39.35% in the additional rate tax band.
Other areas to consider
How much dividend can I take tax-free
When you consider how much dividend is tax-free, this will all depend on your other income.
As mentioned, the tax-free dividend allowance was £2K in 2022/23 and it is now £1,0000 in 2023/24, and the personal allowance in the UK is £12,570.
Therefore, if you consider how much dividend I can take tax-free in 2023/24 and you have no other income at all, you could potentially earn the £1K dividend allowance plus £12,570 personal allowance = £13,570 tax-free. However, in reality, most people will have other income.
What to consider going forward
On an ongoing basis, as a UK contractor or business owner, you should try and keep track of the profit in your company.
If you do this, you then know how much your business can pay you as contractor dividends at any time.
You should also be aware of what you should leave behind in your company to cover the various tax bills.
If you follow the above methods, it makes sure that you do not leave your business short of its tax bills later on.
How much dividend can I take -when your company pays you too much
It is sensible to make sure that you do not take too much dividends as a UK contractor. If this does occur, you may have drawn dividends from the funds required to cover your company’s future tax bills. To sum up, you need to know what is available as ltd company dividends from your business profits before you draw them
If you pay more dividends than are available at any moment, any surplus amounts will need to be treated as a director’s loan. As a result, you should try to repay any overpaid amounts as soon as possible. If you cannot do this currently and the loan remains outstanding, further tax issues can arise.
If you ever find yourself in a position at any time where your company cannot pay its taxes, there are certain things that you need to consider.
Final thoughts
If you are a director of your own company, it’s certainly good to know how much dividend can I take before you pay yourself a dividend. When you do a company profit check and are aware of this, you will know what you can draw from your company in terms of salary & dividends. It’s good practice to work out your business profit and keep a note of this on an ongoing basis. Doing this will keep you aware of the company dividends you can take should the need arise. Doing this also ensures that your business does not have financial difficulty later.
As a final thought, now you know how much your business has in profit, you can also consider something else. When you take your dividends, how does this impact your tax position? If your income is above £50,000 gross, it will incur higher rates tax. Therefore, please read our article that covers the most tax-efficient way to pay yourself.
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