How to time my dividends

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Introduction 

How to time my dividends -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, in terms of timing my dividends, when contractors pay dividends through their limited companies, it is also good to know when and how often to 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.

Initial thoughts

When you are a director and limited company contractor, you might wonder how often can I take dividends from my company. In terms of the contractor dividends from your business, there is no correct answer in terms of dividend timing and when you can take them. Therefore, you can choose your payment date whenever you like, providing enough profits are available to make the payment.

Typically, most 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 dividends

Before we move on, there are many aspects to receiving a dividend from your UK limited company. These include:

  • How to time my dividends (this article).

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 -paying 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.

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, which will be tax efficient. The basic rate tax band amount equates to a gross annual income of £50,270 in the 2022/23 tax year.

The dividend income within your basic rate tax band is 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%. Above this, the additional rate is 39.35% on dividends that fall above a gross annual income of £150,000.

In terms of paying tax on dividend income from your company, you will do this via your Self-Assessment tax return once per year.

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

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

Published On: August 1st, 2022 / Categories: Dividends, Running Your Own Company /

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