How much dividend can I take

Introduction

How much dividend can I take tax free from my business? When you are a UK limited company owner, you can take your income in the form of salary and dividend. However, when we think about how much dividend I can take from my business now, we need to consider how to calculate limited company profit.

Considering how much dividend can I take tax free  or indeed how much dividends one can take is a common thought when someone is running their own company. What we need to do is calculate this and this means we are going to work out the levels of your post-tax company profit.

It is key to know what your post-tax profit levels are on an ongoing basis. To sum up, the amount of company profit that is available determines how much your business can pay you in dividends.

When your company pays dividends, they are paid to the shareholders in the business. Ordinarily, your company should also pay the shareholders in their respective share ratios.

Dividends -other aspects

Before we move on, there are many aspects to paying dividends. These include:

  • how much can I pay (this article);

The methods you can use 

How much dividend can I take -1st method

Before you declare a dividend, you can perform a company profit check and work out the amount of available from post-tax profit in your company. In fact, just like using online tax calculators, this is the method to use, when we look at how to calculate limited company profit:

  • First of all, 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.
  • Now, we deduct our company’s CT at the current rate of 19%. We apply this rate of tax to the profit before tax figure in the previous line.
  • As a result, this gives me our company’s profit after CT.

The profit in your business, after CT is a key figure to know in terms of your finances. This figure shows the amount that is available to make dividend payments from, out of the current year’s profits.

The final step is to add your company’s retained profit from the previous accounts period on to the figure above. The retained earnings amount is the Profit and Loss account balance from the previous set of accounts, as shown in your company’s Balance Sheet.

Once you know your available profit, you can go ahead and declare the dividend and make sure that this does not exceed the available profit level.

How much dividend can I take -2nd method

You can also perform a company profit check by working back from the company bank account balance(s). If you use this method, it will also show how much is available in your company’s profits. You can use the following method to do this:

  • First of all, we take our company’s current bank account balance. If we have more than one company bank account, we add the bank account balances together.
  • Next, we add on to this any company sales invoices that we have raised, including any 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.

UK taxes

Company taxes

  • Value Added Tax (VAT). Usually, any VAT that you owe 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 / National Insurance (PAYE/NIC). You usually pay this 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 that you currently owe is the CT for your company’s current financial year and perhaps the CT for the previous year too.

Personal tax

Personal tax is known as Self-Assessment (SA) and the UK tax year covers 6 April to 5 April. Therefore, the 2021/22 tax year runs from 6 April 2021 to 5 April 2022. When we consider how much dividend can I take tax free, we will need to look at your tax allowances. Every year if you fall under SA, you will be required to complete a Self-Assessment tax return. The actual income tax that you pay is calculated by working out the overall income tax that is due and then we deduct any income tax that 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 current dividend allowance is £2,000, therefore every tax year you can draw this amount tax-free. You also have a personal allowance of £12,570, therefore when you run your own company, you have a total of £14.570 (£2,000 + £12,570) tax free income each tax year.

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.

Dividend tax will depend on which tax band you fall into and the dividend tax rates are set at three different levels. Therefore, the amount of tax you pay on dividend income is 8.75% in the basic rate, 33.75% in the higher rate and 39.35% in the additional higher rate.

How much dividend can I take tax free

When you consider how much dividend can I take tax free, this will all depend on what your other income is.

The current tax-free dividend allowance is £2K and the personal allowance in the UK is £12,570.

Therefore, if you consider how much dividend can I take tax free and you had no other income at all, you could potentially earn the £2K dividend allowance plus £12,570 personal allowance = £14,570 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 dividends at any moment in 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.

If your company pays you too much

You should not overdraw your dividends as a contractor. If this occurs, it could mean that you draw from funds that are required to cover your company’s future tax bills. To sum up, you need to know what is available as dividends from your company’s profits before you draw them.

If you do pay more dividends than are available at any moment in time, any surplus amounts will need treating as a director’s loan. As a result, you should try and repay any overpaid amounts as soon as you can. If you are unable to do this at present 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 what you can draw from this. It’s good practice to work out your business profit and keep a note of this on an ongoing basis. By doing this, you are aware of the dividends that you can take should the need arise. When you do this, it also makes sure that your business does not end up in financial difficulty at a later point in time.

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 have a read of our article that covers the most tax efficient way to pay yourself.

Link to Contractor Advice UK group on

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