What should you consider when you are thinking about when can I take dividends from my company? While doing contract work day to day, contractors sometimes wonder about this. They will think about when is the right time when a dividend can be paid. There is no correct 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.
Before moving on, as a limited company contractor or business owner you should consider several aspects before paying dividends. These include:
When should I pay them (this article)?
When can I take dividends?
Let us look at when can I take dividends from my company. As part of this, we need to consider a couple of things. Your business can pay you dividends at a particular time in the tax year, which can help reduce your personal tax. However, as a limited company contractor, it will depend on your overall taxable income in the current tax year.
You can also be confused about when a dividend payment will be taxable. The answer here is the dividend is taxable when it is `declared as being payable.’ Therefore, you can draw a dividend declaration showing the date 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 some board meeting minutes that approve the dividend payment.
In general, when we consider when can I take dividends from my company, 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 taking the dividend may affect your personal tax position.
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 later, when you so desire.
It is best practice to ensure you use your tax allowances in the current tax year. It is also more tax efficient to do this rather than taking more in a future year when some income may be taxable at a higher tax rate.
Make sure there is enough profit to make the payment
It is key that a limited company paying dividends has enough post-tax company profits before the business pays the dividend. The post-tax profit will include the profit for the current year. The profit is calculated by taking sales and deducting expenses and liabilities for any costs, equating 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 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 on 6 April 2016. Each taxpayer now has an annual allowance, which 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, that the allowance falls inside the income level 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 considering what tax you pay on your dividend income, the amount you will pay depends on your other taxable income in the same tax year.
Dividends are treated as the top slice of your income in a tax context. To explain, these are taxable 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
||Dividend tax rate
|Basic rate taxpayers
||12,571 – 50,270
|Higher rate taxpayers
||50,27 1- 150,000
|Additional rate taxpayers
- The £12,570 shown above is your personal allowance.
- However, please remember that you will also have your annual dividend allowance of £2,000.
- 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. This will probably be a salary; therefore, this will use up some, if not all, of your personal allowance.
- Therefore, besides receiving £2,000 worth of dividends tax-free, you might have some other tax-free dividends if you have any personal allowance left.
- The rest of your dividends 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 dividends over to HM Revenue & Customs, you will do this via your Self-Assessment tax return once per year.
There are certain factors to consider when it comes to thinking about when can I take dividends from my company.
It is best practice to make your dividends and salary payments separately from the company bank account. When you do this, it is 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 is best practice in your accounting records to show clearly which payments are for salary and dividends. 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