How to time my dividends. Indeed, this is a question that does pop up from time to time. Therefore, how to time your dividends is a key thing to bear in mind when you run your own company. What’s more, when you pay dividends, 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 take dividends from your business. There is no right answer here. Therefore, you may choose to take a dividend each quarter or each month. You may take what you need to pay for your living costs.
These costs will include your rent or your mortgage and your bills etc.
Now, before I move on, there are many aspects to paying dividends. These include when should I pay them, the timing of paying them (this article), how much can I pay, the dividend allowance and illegal dividends.
Time your dividends
When you look at how to time your dividends, when should you pay these?
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.
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 some or all of your basic rate tax band. This amount will equate to a total gross annual income that amounts to £50,270 in the 2021/22 tax year.
Dividends that fall within your basic rate tax band are taxable on you personally at 7.5%.
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 32.5%. The rate increases to 38.1% on a gross annual income that is above £150,000.
Take your dividends before the end of the tax year
When you take a look at how to time your dividends, please note 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 you draw the cash by this date 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 need to repay this loan in the future.
Thank you for taking the time to read this article, and I hope it was a good read when it comes to how to time your dividends.
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 perform this process for you, and this will make the dividends paid during the year official.
Link to Contractor Advice UK group on