As a UK limited company contractor, how much dividend can I take from my business? Basically, when considering how much dividends can I take, it’s your choice and it also depends how much profit your company makes. As the owner of a UK contractor limited company, you can take income as salary and dividends. Indeed, you could take UK dividend or salary, however it’s usually more tax-efficient to take a combination of both. However, before you pay yourself a dividend, you should know how to calculate limited company profit. Once you know this, you can consider the level of contractor dividends/disbursement you’d like to draw from your business. What’s more, besides the limited company dividends available from contracting company profits, it’s also useful to know how much dividend can I take tax-free and what’s the maximum dividend available.
How much dividends you can pay are a common thought for UK contractors running their own company. When we calculate what you can draw, we’ll work out your post-tax company profit levels. As a limited company paying dividends, it’s key to be aware of this 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 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. In this guide, we’ll consider how to work out what’s available when taking a dividend from my company. Also, we’ll research the current dividend tax rate(s) and how tax applies.
What to consider first
When you pay yourself a dividend, it’s 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 what amount your business can pay you in contractor dividends.
When we look at who is profit paid to in a company, they’re paid to the shareholders in the business. Therefore, as a contractor with your own company, you’ll likely be the shareholder. As a result, when paying a dividend from a limited company, these are 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, a company that pays this should provide the shareholder with a dividend voucher each time they make a payment.
Many UK limited company owners and contractors 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 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?
Therefore, in this guide we’ll consider all of the above. What’s more, our main focus will be on how to calculate limited company profit and how to work out the amount you can take as dividends from your company.
UK dividends -other aspects
Before we move on, as a limited company contractor, besides considering how much dividend can I take, there’s many aspects to paying yourself a dividend. Basically, considering contractor dividends explained and the different aspects of these, we have other guides:
- How much can I pay (this article)?
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 start a dividend payment calculation and make a disbursement, you can perform a company profit check. Basically, you’ll 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’s the maximum amount from post-tax contracting profits. As a result, this’ll be the amount in your company that’s available for the disbursement. 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 consider 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.
- 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 perform the Corporation Tax calculation to work out CT and then deduct this in the accounts. When we calculate Corporation Tax, the rates are 19% or 25%, depending on whether your company is small or large (see our Corporation Tax guide for details). As part of working out CT, there may be certain items to add back on to the profit such as depreciation, entertaining or other disallowable expenses. We also deduct capital allowances to arrive at the taxable profit subject to CT.
- Finally, we deduct the CT from the profit before tax to give our profit after CT.
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’ll show the maximum amount 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 we consider what’s the maximum you can draw, you can 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’ll also show the amount which 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 company disbursements:
- First, we take our company’s current bank account balance. We add the bank account balances together if we’ve more than one company bank account.
- Next, we add to this any company sales invoices that we’ve raised which 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
There are three main types of business taxes in the UK:
- Value Added Tax (VAT). Usually, any VAT that you owe to HM Revenue & Customs is any VAT that you’ve 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.
- Corporation Tax on company profits and your business will pay Corporation Tax 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. A company pays Corporation Tax once per year and the due date is nine months and one day after the company year-end which it relates to.
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 what can I can draw as a limited company tax-free dividend, we’ll need to consider your tax allowances. If you fall under SA every year, you must complete a Self-Assessment tax return. Your tax liability is calculated at HMRC’s income tax rates and is based on your overall income. We deduct any income tax you’ve paid during the tax year from your liability to arrive at your SA tax bill.
When we consider how much dividend can I take tax-free, you need to review your overall income. The dividend allowance was £2,000 in 2022/23 and 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. Therefore, when you run your own company, you have a total of £13.570 (£1,000 + £12,570) in 2023/24 tax-free income each tax year. Furthermore, income above this’ll incur contractor dividend tax.
Once you’ve completed your Self-Assessment tax return, any tax due can be paid directly to HMRC, or you can request that it’s included in your tax code for the following year.
When we calculate dividend tax, this’ll 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
- 75% in the basic rate band.
- 75% in the higher rate band.
- 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’ll all depend on your other income.
As mentioned, the tax-free dividend allowance was £2K in 2022/23 and it’s 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’ve no other income at all, you could potentially earn the £1K 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 the amount your business can pay you as contractor dividends at any given 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 don’t leave your business short of its tax bills later on.
How much dividend can I take -when your company pays you too much
It’s sensible to make sure that you don’t take too much disbursement income 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’s available as disbursements from your business profits before you draw them.
If you take more than is 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 can’t 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’s certain things you need to consider.
If you’re a director of your own company, it’s certainly good to know how much profits are available before you make a company disbursement. When you do a company profit check and are aware of this, you’ll 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. This also ensures your business doesn’t have financial difficulty later.
As a final thought, now you know what level of profit is in your business, 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’ll incur higher rates tax. Therefore, please read our guide which covers the most tax-efficient way to pay yourself.
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