How to time my dividends

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Introduction 

What should we consider when investigating how to time my dividends as a UK contracting professional? Timing dividends can be essential and may require consideration when contracting. Indeed, this question 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 company. What’s more, when you take company income as dividends, at what point can you take these? In other words, can you take dividends monthly, weekly or over some different timeframe? In this short guide, we’ll look at this and consider timing my dividends as a UK contractor. Therefore, we must consider when and how often you can take dividends from a limited company.

When you run a limited company, dividends are payable to its shareholders in line with the share ratio. For example, if you own 60 shares and your second shareholder owns 40, the dividends are paid in this ratio. Therefore, as a contractor, you can draw limited company contractor dividends. These are out of company profits and in line with your share ratio. What’s more, dividends are payable out of a company’s post-tax profits when a company decides to do so.

As mentioned, 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. When this is the case, the company can pay different dividend rates on each share class.

Initial thoughts 

First thoughts when you time your dividends

When you’re a limited company contractor, you might wonder how often I can take dividends from my company (UK). For instance, you may ask whether I can 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 pay these as and when they choose. All the owner of a UK contracting company must do is make sure there are enough profits to do this. Therefore, you should check the company’s profit levels and determine available funds. Next, you can pay a dividend from these profits via 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, should cover your living and lifestyle costs. What’s more, these costs will include your rent, mortgage, monthly bills, and 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’ve other guides on these areas, and they include:

  • How to time my dividends (this guide).
  • The UK dividend allowance. HMRC sets the annual dividend allowance, which 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 explain when you do this and how you can correct it.

It’s worth noting that when you own your business and pay a contractor’s 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 & how do I pay your UK contractor dividends? 

When you consider a dividend payment from your company, you may wonder about the timing. In other words, you may consider the date you should pay it. Please note that a company can only pay dividends if it has enough post-tax profit to do so. Moreover, a company’s profit will include the current year and any profits from previous years.

How to time my dividends & your tax allowances 

Personal allowance & basic rate tax

The personal allowance (tax-free income) in 2023/24 and 2024/25 is £12,570. When you take out dividends and consider tax, you may first choose to use up your annual tax-free dividend allowance of £1,000 in 2023/24 and £500 in 2024/25. Next, you may take further dividends to use unused personal allowance and some or all of your basic rate tax band. Doing this is 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 the 2023/24 and 2024/25 tax years. What’s more, the dividend income within your basic rate tax band is taxable on you at 8.75%.

Higher & additional tax rates

The higher rate tax bracket covers income above £50,270 up to £125,140 in 2023/24 and 2024/25. Dividends in this higher tax bracket are taxable at 33.75%. Above the upper level of £125,140, additional rate taxpayers pay a tax rate on dividends of 39.35%.

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 & how do I take my 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, and a new tax year starts on 6 April. These are important dates to remember for the UK personal tax year. Therefore, before 5 April, you should check your taxable income for the current tax year. As part of this, you can check to see if you’d like to pay yourself an extra dividend to use any unused tax allowances.

When you take dividends from a company, you should `declare as paid’ any dividends by the date you pay them. In other words, when you decide on a dividend declaration date, this counts as taxable income for the tax year you pay this. Therefore, if you choose 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.

As part of timing my dividends, it’s vital to ensure 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 2024/25, it’s best to pay this before April 5, 2025.

Dividend vouchers & business record-keeping 

When you declare a dividend each time, you can create dividend vouchers (UK) to make this official. You should label the payment as a `dividend’ when recording any dividend amounts in your company’s record keeping. Moreover, 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 as a dividend.

Don’t pay more dividends than company profit 

When you run a company, it’s vital to ensure it doesn’t pay more contractor dividends than are available. Indeed, dividends you can draw from your company is worked out by taking:

  • Your company’s profits to date after you allow for Corporation Taxfor the current period. You work out the profits by deducting any business expenses from your sales or turnover.
  • Add on the retained profit or loss from your company’s previous set of accounts.

The total of the above two sums will give the amount of profit available to take from your company as a dividend.

If you accidentally take too much, you must treat any excess as a director loan and repay it in the future.

Final thoughts 

When we look at how to time my dividends, you can create minutes of meetings and perhaps dividend vouchers when you pay these. Moreover, you can create this paperwork as part of your company’s year-end accounts process. Indeed, the subject of timing my dividends can be significant towards the end of a tax year. In the UK, the tax year ends on 5 April. Therefore, dividend timing will require 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, that’ll make the dividends paid to you during the year official.

Link to Contractor Advice UK group on

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

Published On: April 6th, 2024 / Categories: Dividends, Running Your Own Company /

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