When we look into how to time my dividends as a UK contracting professional, what should we think about? Timing dividends can be important, and may need consideration when contracting. Indeed, this a question which pops up from time to time in terms of a UK contractor’s dividends. The subject of dividend timing and taking contractor dividends is something to be aware of when running your own company. What’s more, when you take company income in the form of dividends, at what point can you take these? In other words, can you take dividends monthly, weekly or over some other timeframe? In this short guide, we’ll look at this and consider timing my dividends as a UK contractor. Therefore, let’s take a look at when and how often can you take dividends from a limited company.
When you run your own limited company, dividends are payable to its shareholders in line with share ratio. I.e., if you own 60 shares and your second shareholder owns 40 shares, the dividends are paid in this ratio. Therefore, as a contracting professional, your business will pay you limited company contractor dividends. These will be out of company profits and in line with your company’s share ratio. What’s more, dividends are payable out of a company’s post-tax profits, when a company decides to do so.
As we mention above, dividends are payable to shareholders in their respective share ratios. That’s unless the company has different classes of shares. To clarify, such shares are known as preferential shares. In this case, the company can decide to pay different rates of dividends on each class of share.
What to consider when timing your dividends
When you’re a limited company contractor, you might wonder how often can I take dividends from my company (UK). For instance, you may consider can I take dividends monthly? Indeed, when you’re taking dividends from your company, there’s no correct answer per se for dividend timing. However, when it comes to timing my dividends, UK contractors can choose to pay these as and when they choose. All the owner of a UK contracting company has to do is make sure there’s enough profits in the company to be able to do this. Therefore, you should check the company profit levels and find out what funds are available. Next, you can pay a dividend out of these profits by making a payment from the company bank account.
Most limited company contractors will pay a dividend each quarter, or each month. Indeed, the income from your company, i.e., your salary and dividends, needs to cover your living and lifestyle costs. What’s more, these costs will include your rent, mortgage, monthly bills and any other monthly outgoings.
Other guides on UK company dividends
Before we move on, besides dividend timing there are many aspects to receiving dividends from your UK contractor limited company. We have other guides on these areas and they include:
- How to time my dividends (this guide).
- The UK dividend allowance. The annual dividend allowance is set by HMRC and is available to individuals. What’s more, any dividends within this allowance are tax-free.
- Illegal dividends. This guide covers what you should do if you draw too much dividends from your company. We also explain when you do this, how you can correct it.
It’s also worth a note, when you have your own business and pay contractor limited company dividends, they’re only subject to income tax. On the other hand, salary, is subject to both tax and National Insurance Contributions.
How to time my dividends -pay your UK contractor dividends
When you consider a dividend payment from your company, you may wonder about the timing of paying this. In other words, you may be thinking about on what date you should make the payment. Key to note, dividends are only payable by a company if it has enough post-tax profit to be able pay these. What’s more, the profit in a company will include the current year’s profits and 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 (this is 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. Next, you may take further dividends to use up any unused personal allowance and some or all of your basic rate tax band. When you do this, it’s part of being tax efficient as you’ll be utilising your tax bands. 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. What’s more, the dividend income within your basic rate tax band is taxable on you personally at 8.75%.
Higher and additional tax rates
The higher rates tax bracket covers income which is above £50,270 and 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 these upper levels, additional rate taxpayers pay a tax rate of 39.35% on dividends. Therefore, a person will pay 39.35% tax on dividends which are above a gross annual income of £150,000 2022/23 and £125,140 in 2023/24.
In terms of how you pay the tax on dividend income from your company, you do this via your Self-Assessment tax return once per year.
Pay your UK contractor dividends
How to time my dividends -take your dividends before the end of the tax year
As a limited company contractor, it’s key to note that the UK personal tax year ends on 5 April. Likewise, a new personal tax year starts on 6 April. These are important dates to remember for the UK personal tax year. Therefore, before 5 April arrives you should check your taxable income in the current tax year. As part of this you can check to see if you’d like to pay yourself an extra dividend to make use of any unused tax allowances.
When you take dividends from a company, you need to `declare as paid’ any dividends by the date that you pay these. In other words, when you decide on a dividend declaration date, it counts as taxable income for the tax year in which you pay this. Therefore, if you decide to pay a dividend towards the end of the tax year and you’d like to include it in the tax year in question, you should `declare it as paid’ before the end of that tax year.
As part of timing my dividends, it’s key to make sure that a dividend payment date is before the end of the tax year to avoid any ambiguity from a tax point of view. Therefore, if you’re taking a dividend towards the end of 2023/24, it’s best to make sure that you pay this before 5 April 2024.
Dividend vouchers and business record keeping
When you declare a dividend each time, you can create dividend vouchers (UK) to make these official. In terms of how to record any dividend amounts, you should label the payment as a `dividend’ in your company’s record keeping. What’s more, many contractors now use accounting software as part of an online package. Therefore, if your company’s business records are online, you should label such a payment in your records this as a dividend.
Do not pay more dividends than are available as profit
When you run a company, it’s vital to ensure that your company does not pay more contractor dividends than are available. Indeed, dividends that you can draw from your company is worked out by taking:
- Your company’s profits to date after you allow for Corporation Tax for the current period. You work out the profits by deducting any business expenses from your sales or turnover.
- Add on the profit or loss brought forward from your company’s previous set of accounts.
The total of the above two sums will give the amount of profit that’s available to take from your company as a dividend.
If you do take too much by accident, you must treat any excess as a director loan. As a result of taking too much, you need to repay this loan in the future.
When we look at how to time my dividends, you can create minutes of meetings and perhaps dividend vouchers when you pay these. What’s more. you can create this paperwork as part of your company’s year-end accounts process. Indeed, timing my dividends can be important, by a large extent when it comes to the end of a tax year. In the UK, the tax year ends on 5 April, therefore dividend timing will need careful thought around this time each year.
If you have an accountant, they’ll usually produce year-end minutes of meetings for you. As a result, this’ll make the dividends paid to you during the year official.
Link to Contractor Advice UK group on