When can I take dividends

Introduction 

What should you consider when you are thinking about when can I take dividends from my company? Some contractors will wonder about this and think about when is the right time when a dividend can be paid. There is no right answer here, and many will choose to take these each month or each quarter.

Please note, though, when you are considering when can I take dividends from my company, the time when you make these payments depends on your finances and your planned income levels.

Now, before we move on, there are several aspects to consider for business owners, when it comes to paying dividends. These include when should I pay them (this article), the timing of paying themhow much can I pay, the annual allowance for dividends and when dividends are illegal.

When can I take dividends?

When we look at when can I take dividends from my company, your business can pay you dividends at a certain time in the tax year and this can help to reduce your personal tax. However, it will depend on what your overall taxable income is in the current tax year.

You can also be confused when such a payment will be taxable. The answer here is the dividend is taxable when it is `declared as being payable.’ Therefore, you can draw up a dividend declaration which will show the date that the dividend is payable.

The dividend declaration can be drawn up in a form called a dividend voucher. The date of this voucher is the date when the payment is taxable. You can also hold a directors meeting or board meeting and draw up a meetings minute that approves the dividend payment.

Drawing a dividend towards the end of the tax year

It may be towards the end of a tax year, and you have decided that you do not want to pay yourself an extra dividend. 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. Alternatively, you can also draw the cash from your business at a later date, when you so choose.

It is best practice to make sure that you are making use of your tax allowances in the current tax year. It is also better than taking more in a future year when some income may be taxable at the higher tax rate.

Make sure there is enough profit to make the payment

It is key to check that you have enough post-tax profit in the company before it pays you a dividend. The post-tax profit will include the profit for the current year (sales less expenses = pre tax profit less Corporation Tax = post-tax profit) as well as any retained profit brought forward from the previous financial period.

Please see how much you can draw as dividends as this article explains how you can work this out.

The annual dividend allowance

The dividend system was changed from 6 April 2016. Each taxpayer now has an annual allowance, and this is currently £2,000. If you have enough funds in your business, you should make sure that you pay at least £2,000 each year to use up your dividend allowance.

Please note however, the allowance falls inside the level of income that taxpayers are taxable on under basic rate tax. In 2022/23, this is on gross annual income up to £50,270.

Tax on dividends

When it comes to considering what tax you pay on your dividend income, the amount that you will pay depends on what your other taxable income is in the same tax year.

Dividends are treated as the top slice of your income in a tax context i.e., these are after all other sources of income such as employment, rental profits, pension income, self-employment income etc.

The rates of tax that apply in 2022/23 are:

Income tax band Thresholds Dividend tax rate
Personal allowance 0-12,570 0%
Basic rate taxpayers 12,571 – 50,270 8.75%
Higher rate taxpayers 50,27 1- 150,000 33.75%
Additional rate taxpayers 150,000 upwards 39.35%

The £12,570 shown above is your personal allowance however please remember that you will also have your annual dividend allowance of £2,000 too. Therefore, if you had no other taxable income, you could earn £12,570 + £2,000 – £14,570 in dividends before you pay tax. In all likelihood though you will probably have other income such as a salary therefore this will use up some if not all of your personal allowance. Therefore, besides being able to receive £2,000 worth of dividends tax-free, you might have some other tax-free dividends if you have any personal allowance left and the rest of the dividends up to the higher rates tax level of £50,270 will be taxed at the basic rate of 8.75%.

In terms of actually paying your tax on dividends over to HM Revenue & Customs, you will do this via your Self Assessment tax return once per year.

Final thoughts

It is best practice to make your dividends and salary payments separately from the company bank account. When you do this, it is clear in your business records and accounting system what any payments are in respect of.

If you combine the payments, this could present questions from HMRC later on. If it is clear in your accounting records which payments are for salary and which are dividends. This will then save you 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: March 24th, 2021 / Categories: Contractor Tips, Dividends /

Share This Story, Choose Your Platform!

Leave A Comment