As a UK limited company contractor, how much dividend can I take from my business? You can take your income as salary and dividends as a UK limited company owner. However, when we consider how much contractor dividends I can take from my business now, we need to know how to calculate limited company profit. Besides available dividends from company profits, it is also useful to know how much dividends can I take tax-free.
Considering how much dividends can I take or how much dividends can I take tax-free is a common thought when someone is running their own company. When we calculate how much dividends can you take, we will work out your post-tax company profit levels.
It is key to know your post-tax profit levels on an ongoing basis and 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 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, as a limited company contractor 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 -the first method
What is the maximum dividend a company can pay? Before you declare a dividend, you can perform a company profit check and work out the amount available from post-tax profit in your company that is available for your contractor dividends. Just like using online tax calculators, this is the method to use when we look at how to calculate limited company profit:
- 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 deduct our company’s CT at the current rate of 19%. 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.
After CT, the profit in your business is a key figure to know in terms of your finances. This figure shows the amount available to make dividend payments 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 amount is the Profit and Loss account balance from the last 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 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). Using this method will also show how much is available in your company to pay as dividends. Therefore, you can use the following to calculate this:
- 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.
- 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 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 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 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. 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.
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 contractor dividend 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-free
When you consider how much dividend I can take tax-free, this will all depend on your other income.
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 I can take tax-free and you have 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 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.
If your company pays you too much
Notably, it would help if you did not overdraw your dividends as a contractor. You could draw from the funds required to cover your company’s future tax bills if this occurs. To sum up, you need to know what is available as dividends from your company’s 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.
If you are a director of your own company, it’s certainly good to know what you can draw from this 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 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.
Link to Contractor Advice UK group on