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Introduction
How to time my dividends as a UK contracting professional -this is a question that does pop up from time to time. The subject of when best to pay contractor dividends is something to be aware of when you run your own company. What is more, as a UK contractor in terms of timing my dividends, it is also good to know when and how often can you take dividends from a limited company.
Dividends are payable by a company to its shareholders in line with share ratios. These are payable out of a company’s post-tax profits when the company decides to do so. As mentioned, dividends are payable to shareholders in their respective share ratios unless the company has different classes of shares. Such shares are known as preferential shares and the company can decide to pay different rates of dividends on each class of share.
Initial thoughts
How to time my dividends
When you are a director and limited company contractor, you might wonder how often can I take dividends from my company (UK). In terms of what to consider when taking dividends from your company, there is no correct answer in terms of dividend timing and when you can take them. Therefore, when it comes to UK contractors taking dividends from their company, they can choose the payment date whenever they like. All that the owner of a UK contacting company has to do is make sure there are enough profits available to make the payment.
Typically, most limited company contractors will pay a dividend each quarter or each month. Your income from your company, i.e., your salary and dividends, will need to cover your living and lifestyle costs. These costs will include your rent, mortgage, monthly bills, etc.
Other areas to consider when paying contractor dividends
Before we move on, there are many aspects to receiving dividends from your UK contractor limited company. These include:
- How to time my dividends (this article).
- The dividend allowance.
It is also worth mentioning that when you have your own company when you pay dividends, they are only subject to tax, unlike a salary, which is also subject to National Insurance Contributions.
How to time my dividends -pay your contractor dividends
When you consider a dividend payment from your company, when should you do this? First of all, dividends are only payable by a company if it has enough post-tax profit to be able to do so. The profit in the company will include any profits brought forward from previous years.
How to time my dividends and your tax allowances
Personal allowance and basic rate tax
The personal allowance (tax-free income) in 2022/23 and 2023/24 is £12,570. When you take out dividends and think about tax, you may first choose to use up your annual tax-free dividend allowance of £2,000 in 2022/23 and £1,000 in 2023/24. You may then take further dividends to use up any unused personal allowance and some or all of your basic rate tax band, which will be tax efficient. The basic rate tax band amount equates to a gross annual income of £50,270 in both the 2022/23 and 2023/24 tax years.
The dividend income within your basic rate tax band is taxable on you personally at 8.75%.
Higher and additional rate tax
The higher rates tax bracket covers income that is above £50,270 up to £150,000 in 2022/23 and £125,140 in 2023/24. Therefore, If you take dividends in the higher tax bracket, these are taxable on you personally at 33.75%. Above this, the additional rate is 39.35% on dividends that fall above a gross annual income of £150,000 2022/23 and £125,140 in 2023/24.
In terms of paying tax on dividend income from your company, you will do this via your Self-Assessment tax return once per year.
Pay your dividends
How to time my dividends -take your dividends before the end of the tax year
As a limited company contractor, it is important to note that the personal tax year ends on 5 April.
Therefore, when you take dividends from your company, you must make sure that you `declare as paid’ any dividends by this date. When you make a dividend declaration, it will count as taxable income for the tax year that has just passed.
It is also wise to make sure that the dividend payment date is before the end of the tax year to avoid any ambiguity from a tax point of view.
Do not pay more dividends than are available as profit
It is vital to ensure that your company does not pay more contractor dividends than are available. This available figure is your company’s profits to date after you allow for Corporation Tax for the current period. If you take too much by accident, you must treat any excess as a director loan. As a result, you will then need to repay this loan in the future.
Final thoughts
As a final thought when looking at how to time my dividends, when you draw up the paperwork for these, you can create minutes of meetings and perhaps dividend vouchers as part of your company’s year-end process. Your accountant will usually perform this process for you, making the dividends paid during the year official.
Link to Contractor Advice UK group on
