How much dividend can I take & how much dividend can i take tax free & company profit

Share This Guide, Choose Your Platform!

Introduction 

As a UK limited company contractor, let’s consider how much dividend I can take from my business. When considering how much dividends I can take, it’s your choice and depends on 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 a UK dividend or salary. However, it’s usually more tax-efficient to combine 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 contractor dividends/disbursement level you’d like to draw from your business. What’s more, besides the limited company dividends available from contracting company profits, knowing how much you can take tax-free and the maximum dividend available is helpful.

A common question for UK contractors running their own company is how much dividends they can pay. 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 you can draw from. 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.

Initial thoughts 

First thoughts

When you pay yourself a dividend, it’s vital to know your post-tax profit levels on an ongoing basis. Therefore, we should know how to calculate limited company profit. In summary, the 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 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 pay the shareholders in their respective share ratios. As part of the paperwork for UK dividends, a company should provide the shareholder with a dividend voucher each time they make a payment.

Common questions

Many UK limited company owners and contractors have questions 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 do you 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 the above. What’s more, our 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 I can take, there are many aspects to paying yourself a dividend. Indeed, considering contractor dividends explained and the different aspects of these, we’ve other guides:

  • How much can I pay (this article)?

Two methods on how to calculate the maximum dividend a company can pay? 

How much dividend can I take -first maximum dividend method

What is the maximum dividend a company can pay while you’re UK contracting? Before you start a dividend payment calculation and disbursement, you can perform a company profit check. You’ll calculate your company profit for the current financial year and then calculate limited company tax. Next, the tax is deducted from the profit to arrive at the profit after tax for the current year. From this, we can deduce the maximum amount from post-tax contracting profits. As a result, this will be the amount in your company available for the disbursement. Indeed, just like online tax calculators, limited company contractors can use the above method before working out dividend payments (UK).

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 company profit before Corporation Tax (CT).
  • Now, we perform the Corporation Tax calculation to calculate 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, certain items may require adding back to the profit, such as depreciation, entertainment or other disallowable expenses. In addition, we 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.

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 amount available to draw from your company. Furthermore, once you know your available profit, you can go ahead and declare the UK dividend and ensure this doesn’t 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 calculate the pre- and post-tax profit for you.

How much dividends can I take -the second method 

When we consider 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’s bank account balance(s). Limited company contractors can use this method, and it’ll also show the amount 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 we’ve raised which are still outstanding.
  • Then, we deduct from this any outstanding company tax bills. We must calculate these tax bills up to the present day.

How much dividend can I take -what are the UK taxes a contractor may pay?

Company taxes

There are three main types of business taxes in the UK:

  • Value Added Tax (VAT). Usually, any VAT you now owe to HM Revenue & Customs is any VAT you’ve yet to declare on the next VAT return. Therefore, this may 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 you now owe is generally for the latest month or last quarter.
  • Corporation Tax on company profits, and your business will pay Corporation Tax annually. You may not have yet paid last year’s CT charge. 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 to which it relates.

Personal tax

Personal tax is known as Self-Assessment (SA), and the UK tax year covers 6 April to 5 April. Therefore, the 2024/25 tax year runs from 6 April 2024 to 5 April 2025. We must look at your tax allowances when considering what I can draw as a limited company tax-free dividend. You must complete a Self-Assessment tax return if you fall under SA every year. 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.

You should review your overall income when considering how much dividend you can take tax-free. The dividend allowance was £1,000 in 2023/24 and is £500 in 2024/25. Therefore, you can draw this amount tax-free from your company every tax year before you pay UK dividend tax. In addition, you have a personal allowance of £12,570. Therefore, when you run your own company, you have a total of £13,070 (£500 + £12,570) tax-free income in the 2024/25 tax year. Furthermore, income above this will incur contractor dividend tax.

Once you’ve completed your Self-Assessment tax return, any tax due can be paid directly to HMRC or requested to be included in your tax code for the following year.

When we calculate dividend tax, it depends 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.

More thoughts

How much dividend can I take tax-free? 

When you consider how much dividends are tax-free, it also depends on your other income.

As mentioned, the tax-free dividend allowance was £1K in 2023/24 and is now £500 in 2024/25. Likewise, the personal allowance in the UK is £12,570 in 2023/24 and 2024/25.

Therefore, if you consider how much dividend I can take tax-free in 2024/25 and you have no other income, you could earn the £500 allowance plus £12,570 personal allowance = £13,070 tax-free. However, most people have other income, too.

Future thoughts

As a UK contractor or business owner, you should try to keep track of your company’s profit on an ongoing basis. If you do this, you will know how much your business can pay you as contractor dividends at any time. In addition, you should be aware of what you should leave behind in your company to cover the various tax bills. Following the above methods will ensure you don’t leave your business short of its tax bills later.

How much dividend can I take & what happens when your company pays you too much? 

As a UK contractor, it’s sensible to avoid taking too much disbursement income. 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 must 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 must 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 your company ever finds itself in a position where it can’t pay its taxes, there are certain courses of action to consider.

Final thoughts

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 understand this, you’ll see what you can draw from your company regarding salary & dividends. It’s good practice to work out your business profit and note this on an ongoing basis. Doing that will inform you 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 that you know your business’s profit levels, you can consider something else. How does taking dividends impact your tax position? You’ll incur higher tax rates if your income exceeds £50,270 gross. Therefore, please read our guide, which covers the most tax-efficient way to pay yourself.

Link to Contractor Advice UK group on

LinkedIn    https://www.linkedin.com/groups/4660081/

Share This Guide, Choose Your Platform!

Leave A Comment