Dividends are subject to separate tax from PAYE, and knowing your allowances and ensuring you pay the right amount of tax is vital, so this RJF Accounting guide will run you through what you need to know.
What Is a Dividend?
A dividend is a share of a limited company’s profits passed to a shareholder or director as a payment. A limited company can only pay dividends if sufficient profits cover the amount after the company has covered all of its expenses and liabilities.
Shareholders could receive different amounts of dividends depending on the percentage of the company owned. For example, if two people owned the company equally, they would get 50% of the amount available for dividends. However, if four people held an equal share, they would each get 25%.
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What Tax Do You Pay on Dividends?
Like most things, when it comes to tax, it is never as simple as one, two, three! Dividend tax differs from income tax and has its allowance, but the amount of tax you will pay on your dividends also takes into account your other income from, say, a salary.
Firstly dividends are not subject to National Insurance, and the 2022/23 tax year allowance for them is set at £2,000. Anything above the tax-free allowance is subject to tax at the following rates:
- Basic rate taxpayer – 8.75%
- Higher rate taxpayer – 33.75%
- Additional rate taxpayer – 39.35%
Now where it gets complicated can be when you factor in your tax allowance for income tax and your earnings elsewhere, and this is where a good accountant will be worth their weight in gold. If you have a salary and are planning to draw dividends, it is always advisable to speak to an accountant; that way, they can work out the most tax-efficient way for you to do so – while maximising your tax-free amounts.
It is worth mentioning that if you own shares in a limited company and sell them, you could be subject to not only dividend tax on dividends already taken but also capital gains tax on the profits you made on the sale.
How to Pay Tax on Dividends
Dividends are usually declared on your self-assessment tax return, due by January 31st. If your dividends are between £2,000 and £10,000 and you are not required to complete a SATR, then you can call HMRC and ask them to amend your tax code to pay the correct tax. However, for anything over £10,000, you will be required to complete the SATR.
How to Pay Tax on Dividends
If you need some help figuring out your dividend tax and what might be payable, why not speak to the team here at RJF Accounting? We are a team of accountants specialising in everything from VAT to PAYE and accounting for limited companies!