If your business is incorporated as a limited liability company, paying dividends in addition to a salary is often the most tax-efficient way to withdraw cash. To help you meet your company’s legal self-pay requirements, we’ll explain how often you can receive dividends and how the process works.
What is a Dividend?
A dividend is the payment of part of the profits of a company and is distributed to its shareholders. Profit is essentially what is left in the business when all taxes, expenses and liabilities are paid. Also known as “retained earnings,” this excess money can build up over time. See our short video below on how to pay yourself out of your limited partnership with dividends.
How Much Can My Company Pay In Dividends?
There is no limit or fixed amount; You can even pay your shareholder’s different amounts of dividends. Dividends are paid out of a company’s earnings, so payments can fluctuate based on available earnings. If the business has no retained earnings, it cannot make dividend payments. If you do, you will probably end up in trouble with HMRC, with penalties to pay!
Before paying a dividend to yourself or to your shareholders, you need to make sure there is enough cash in the business to cover the daily cash flow. It is also good to keep some profit in the company after paying dividends so that the funds can be used for other activities such as modernizing assets or investing in growth.
When Can My Company Pay Dividends?
There are no hard and fast rules about how often you can pay a dividend, and you can pay it to yourself or to your shareholders at any time.
However, accepting ad hoc payments on a regular basis at random times during the year can sometimes indicate that there are problems with the way the funds are being managed. Most companies distribute them quarterly or semi-annually after determining what profits are left.
The Timing of Dividend Payments Can Affect the Amount of Tax You Have To Pay
For many companies, especially after the pandemic, profits can fluctuate dramatically from year to year. In a particularly profitable year, you can take tactical action to pay dividends and reduce lean periods. This can also result in a more even income pattern, which makes personal financial planning less stressful and can even help you avoid a higher tax rate.
For example, if your business had a profit of £ 50,000 in the first year and £ 10,000 in the second year, your business’s profit for two years would be £ 60,000. Instead of paying a big dividend one year and a small dividend the next year, you could choose to opt for dividends of £ 30,000 a year.
This means that you will have more regular income and if all of your income comes from these dividend payments you will be below the base tax rate every year.
If I Declare Dividends When Will They Actually Be Taxed? The Day Of the Declaration Or When Making The Payment?
Not the correct answer either! A dividend will be included on your tax return based on the date it was declared due, regardless of when it was actually paid. For example, if you declare a dividend on April 1, 2021, that is payable on April 7, 2021, this amount falls in the fiscal year 2020/21 for tax purposes.
If the amount was paid on April 4, it would be a loan through April 7. I would not change the fiscal year that counts as a dividend. You should keep copies of all dividend receipts and records supporting the dividend as evidence for HMRC in case they ever investigate.
Your accountant should be able to provide you with a template and then send you copies for your records each time. There are also tax structuring options. If you do not want to physically pay a dividend at a certain time, but part of your base tax rate remains and the company has sufficient profit, you can declare a dividend payable immediately with the intention of withdrawing cash in the future. date. This ensures that the dividend falls in a specific tax year and that you can make the most of your tax breaks year after year.
As part of a review of dividend taxation, a new ‘dividend allocation’ was introduced as of April 6, 2016. This currently applies to the first £ 2,000 in dividend income (as of April 2021). This amount is taxed at zero rates, so it is beneficial to take at least £ 2,000 in the tax year, regardless of what tax bracket you are in.
When Do I Pay Tax On Dividend Payments?
Unlike a salary, dividends are not taxed at the source, so you must report them as part of a self-assessment tax return. Taxes on dividends are normally due to be paid to HMRC by the month of January following the end of the financial year in which the dividend was paid.
For example, if a dividend was paid at the end of March 2020, the tax is due in January 2021. A dividend paid at the end of April 2020 falls in the next tax year, so the tax does not have to be paid. by January 2022 (although you can register your taxes in advance!).
How Does the Dividend Tax Work?
Dividends come from the company’s after-tax profits, so you don’t pay tax on the dividend payments you make. Shareholders who receive a dividend are usually required to declare this on a self-assessment tax return and pay the tax accordingly. We have a guide to help you get started with self-assessment if this is new to you!
Entrepreneurs who operate as limited partnerships typically pay off through a combination of a regular salary and dividend payments to be more tax efficient. The most tax-efficient salary for a CEO depends on how many of you are in the business.
What about the Tax-Free Dividend Allocation?
You can earn a maximum of £ 2,000 in dividends in the 2021/22 tax year before income tax is payable. This is in addition to your allowance of £ 12,570 in the tax year 2021/22.
Which Dividend Tax Rates and Thresholds Apply For the Financial Year 2021/22?
The dividend tax rates have remained unchanged for three years. Essentially, any other dividends you receive, regardless of their source, will be taxed once your tax-free dividend allotment and allotment of £ 2000 is used up.
The amount of personal tax you have to pay on dividend income depends on your tax bracket (known as the “marginal rate”). The rates are not as high as the income tax rates, which is what makes dividends so tax efficient.
It is important to understand how dividends and taxes work and maintain clear financial records for the company and its earnings. If you can’t prove that the money you’re getting from your business is a dividend, HMRC can consider it a salary payment and tax it accordingly. The income tax rate is higher than the dividend tax rate, so it can be a costly mistake, especially if you get a penalty as well! Oh.