How to time my dividends. This is a question that does pop up, from time to time. Therefore, this is something to bear in mind when you run your own company. What’s more, when you pay dividends through your company, it is also good to know when and how often you should pay these.
Dividends are payable by a company to its shareholders. They are payable out of a company’s post-tax profits. They are also payable to the shareholders in their respective share ratios.
When you are a director and you run your own company, you might wonder when you should receive a dividend from your business. There is no right answer here. Therefore, you can choose your payment date whenever you like, providing there are enough profits available to make the payment.
Typically, most contractors will make a dividend payment each quarter or each month. In effect, your income from your company, which is salary and dividends, will need to cover your living and lifestyle costs. These costs will include your rent or your mortgage and your monthly bills etc.
Other areas to consider when paying dividends
Now, before we move on, there are many aspects to paying dividends. These include:
- the timing of paying them (this article)
Paying your 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 that are brought forward from previous years.
The personal allowance (tax free income) in 2022/23 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. You may then take further dividends to use up any unused personal allowance and some or all of your basic rate tax band and this will be tax efficient. The basic rate tax band amount equates to a total gross annual income that amounts to £50,270 in the 2022/23 tax year.
Dividend income that falls within your basic rate tax band are taxable on you personally at 8.75%.
The higher rates tax bracket covers income that is above £50,270. If you take dividends in the higher tax bracket, these are taxable on you personally at 33.75%. The tax rate increases to 39.35% on dividends that fall into gross annual income above £150,000.
In terms of paying tax on your dividends, you will do this via your Self-Assessment tax return, once per year.
Take your dividends before the end of the tax year
It is important to note that the personal tax year ends on 5 April each year.
Therefore, when you take dividends from your company, you need to make sure that you `declare as paid’ any dividends by this date. When you do so, they will count as taxable income for the tax year that has just passed.
It is also wise to make sure that dividend payment date is before the end of the tax year too, to avoid any ambiguity from a tax point of view.
Do not pay more dividends than are available as profit
It is key to make sure that your company does not pay more dividends than are available. This figure is your company’s profits to date, after you allow for Corporation Tax for the current period. If you do take too much by accident, you will need to treat any excess as a director loan. As a result, you will then need to repay this loan in the future.
When you draw up the paperwork for your dividends, 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, and this will make the dividends paid during the year official.
Link to Contractor Advice UK group on