when can I take dividends from my UK company

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Introduction 

When running your own contractor company, what should you consider regard to when can I take dividends from my company? In addition, what should you consider about how often can I take dividends from my UK company? Basically, if one asks when can you take dividends (also called distributions), there’s various considerations. Indeed, when you’re taking dividends from your company, you need to consider how do dividends work (UK). Also, if we think about UK limited company contractor dividends or salary, when should you pay yourself? What’s more, if we consider limited company dividends vs salary (UK), you’ll likely take your income as a combination of salary and dividends (limited company). Therefore, in this guide, we’ll research how company distributions work. We’ll also look at how to take dividends from a limited company and how often can I take dividends from my company (UK).

While you do your UK contracting work from day to day, you’ll be kept very busy. However, many limited company contractors will sometimes wonder about when they can make company distributions. Dividend payments are disbursements to shareholders from company profits. Therefore, many UK contractors will think about when’s the right time to pay these. What’s more, many will ask how often UK dividends can be paid. Basically, there’s no correct answer in respect of how often are dividends paid (UK). Indeed, when you consider how often can you take a disbursement, many will choose to take these each month, quarterly or every six months.

In this guide, we’ll investigate when you can take UK dividends/disbursements from your business. Furthermore, we’ll also consider what else to think about in respect of this as part of being an owner of a limited company paying dividends.

Initial thoughts 

First thoughts on taking director dividends from a company 

As a UK contractor professional, how often and when can I take dividends from my contracting business? If you consider this, the time when you make these payments depends on your current finances. What’s more, it also depends on your planned income levels. HMRC have their basic guidelines on taking money out of a limited company. Furthermore, when you take a dividend, this depends on your total number of shares. A company pays distributions to its shareholders based on their shareholdings. Therefore, let’s now research how often can I take dividends from my company (UK) and what we should consider here.

Common questions 

As a UK limited company owner, you may have questions around when you can take company disbursements. This is common amongst contractors and other limited company owners and such questions and thoughts include:

  • How to pay yourself dividends?
  • How do dividends work in a limited company?
  • When can you pay dividends?
  • How often can you take dividends?
  • How much can I take in dividends?
  • Do I pay tax on dividends from my limited company?
  • How many dividends can you take a year?

In this guide, we’ll cover the above and find out when your company can make a disbursement. As a contractor, it’s good to know this as it’ll also help you plan going forward in terms of your income.

Other guides

Before moving on, as a limited company contractor or business owner you should consider several aspects before pay a dividend disbursement. Besides, knowing how to pay yourself in dividends, these include:

  • When can you pay yourself dividends (this guide)?
  • The annual dividend allowance. This is the annual tax-free allowance for disbursements and is available to all UK individuals.
  • When UK contractor limited company dividends are illegal. We look here at what to do when you paying yourself dividends from a ltd company and have taken too much disbursements.

These are all very useful guides and will help get you clued up on how to make disbursements when you are a company owner. What’s more. there’s are also many other useful guides on this website that help you plan your finances and save tax as a contractor.

Secondary considerations 

When can I take dividends as a UK contractor? 

Let’s now look at when can you take dividends. As part of this, we need to consider a couple of things. Your business can make a disbursement at a particular time in the tax year, which can help reduce your personal tax. However, when can you take dividends as a limited company contractor, it’ll depend on your overall taxable income in the current tax year.

As part of considering when can I take dividends from my contracting business, you can also be confused about when a disbursement will be taxable. The answer here is the disbursement is taxable when it’s `declared as being payable.’ Therefore, you can draw up a dividend declaration showing the date the disbursement is payable.

Dividend declaration

A dividend declaration can be drawn up in a form called a dividend voucher (UK). The date of this voucher is the date when the payment is taxable. In addition, you can also hold a directors’ meeting or board meeting and draw up some board meeting minutes. These minutes will approve the disbursement.

What to bear in mind when you take a disbursement

In general, when we consider how often can I take dividends from my company (UK), the answer is you can do this any time you want. However, you need to:

  • Ensure there is enough profit in your company to do this.
  • Bear in mind how making the disbursement may affect your personal tax position.

These are both important points to remember and you should take note of these so that you can plan accordingly.

Other thoughts when you make contractor dividend payments

When can I take dividends from my company -make a disbursement at end of tax year

It may be towards the end of a tax year, and you’ve decided that you don’t want to make an extra disbursement. However, you may still have part of your tax allowances or basic rate tax band available. You can choose to declare a dividend payable straight away. Om addition, you can also draw the cash from your business later, when you so desire.

It’s best practice to ensure you use your tax allowances in the current tax year. It’s also more tax efficient to do this rather than taking more in a future year. This is because in a future year your income may be taxable at a higher rate of tax or indeed tax rates may go up

Make sure there’s enough profit to make the payment 

It’s key that a UK contractor limited company which makes disbursements has enough post-tax company profits before it pays the disbursement. The post-tax profit will include the profit for the current year. The profit is calculated by taking sales generated and deducting each business expense along with any liabilities for costs and this equates to pre-tax profit. We deduct the Corporation Tax from the pre-tax profit, which gives the post-tax profit. We also need to add on any retained profit from the previous financial period.

Please see the guide we mention above on how much you can draw as dividend income, as this explains how you can work this out.

The annual dividend allowance 

The dividend system was changed on 6 April 2016. Each taxpayer now has an annual allowance, which is currently £2,000 in 2022/23. However, this is reducing to £1,000 in 2023/24 and £500 in 2024/25. Therefore, if you’ve enough funds in your business, you should make sure that you pay at least £1,000 in 2023/24 to use up your DA.

Tax bands and further thoughts

When can I take dividends from my company -the tax on disbursement income

Let’s now consider what tax on limited company dividends you pay. Basically, the amount of tax you’ll pay depends on your other taxable income in the same tax year. However, it’s key to note that income tax and national insurance contributions are payable on salaries. On the other hand, only tax is payable on disbursement income.

Dividend income is treated as the top slice of your income in a tax context. To explain, these are taxable after all other sources of income. Such other sources will include employment income, rental profits, pension income, self-employment income, etc.

The UK tax bands and tax rates

The rates of income tax that apply in 2022/23 and 2023/24 are:

Income tax band Thresholds 2022/23 Thresholds 2023/24 Dividend tax rate
Personal allowance 0-12,570 0-12,570 0%
Basic rate taxpayers 12,571 – 50,270 12,571 – 50,270 8.75%
Higher rate taxpayers 50,27 1- 150,000 50,27 1- 125,140 33.75%
Additional rate taxpayers 150,000 upwards 125,141 upwards 39.35%

We will continue to update the above as the rates and allowances change in the future. 

What to consider going forward

As part of the above, please bear in mind the following:

  • The £12,570 shown above is your personal allowance.
  • However, please remember that you’ll also have your annual DA of £2,000 in 2022/23 and £1,000 In 2023/24.
  • Therefore, if you’ve no other taxable income, you could earn £12,570 + £2,000 – £14,570 in UK company dividends before you pay tax in 2022/23. In 2023/24 this will be £12,570 + £1000 = £13,570.
  • In all likelihood, though, you’ll probably have other income. This’ll probably be a salary; therefore, this’ll use up some, if not all, of your personal allowance.
  • When paying yourself dividends of £2,000 or £1,000 tax-free, you might have some other tax-free dividends if you’ve any personal allowance left.
  • The rest of your disbursements up to the higher rates tax level of £50,270 will be taxed at the basic rate of 8.75%.
  • In terms of paying your tax on company disbursements over to HM Revenue & Customs, you’ll do this via your Self-Assessment tax return once per year.

The are all key points and you can bear them in mind when taking disbursements from your limited company. Indeed, we’ll update these going forward too whenever the government make changes to tax allowances or tax rates.

Final thoughts 

There’s certain factors to consider for UK contractors, when it comes to thinking about when and how often can I take dividends from my UK company. Basically, you’ll need to consider what your current level of personal income is in the current tax year. In addition, you’ll need to evaluate if your company has enough funds to pay the proposed distribution.

It’s best practice for a company to pay a UK contractor’s dividends and salary payments separately from the company bank account. When you do this, it’s evident in your business records and accounting system what any payments are in relation to.

If you combine the payments, this could present questions from HMRC later on. Therefore, it’s best practice in your accounting records to show clearly which payments are for UK contractor dividends and salary. This may then save you from having to answer unnecessary questions from HMRC at a later date.

Link to Contractor Advice UK group on LinkedIn

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

Published On: January 4th, 2024 / Categories: Contractor Tips, Dividends /

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