What Are Dividends?
Dividends are the part of company’s profits that is distributed by the company among its shareholders after the execution of retained earnings. Limited companies may only pay dividends as they are the only type of business that issue shares. However regardless of whether the organization has enough money to pay the profit, it is unlawful for the dividend to be paid if there is no available profits. Companies issue interim dividends which is approved by the directors, however a final dividend is approved by the shareholders with the annual accounts. Mostly interim dividends are paid once in a year at directors discretion.
Dividends : Salary v/s Dividend
Usually company owners are both directors and shareholders in their business, hence as a director they are entitled to a salary and as a shareholder are entitled to dividends, since shareholding is an investment in the company. Major difference between tax on dividend v/s salary is National Insurance- which doesn’t apply to dividends but to salaries upto 25.8%. Again dividends cannot be offset against the corporation tax in the same way that salaries can.
How are dividend Taxed ?
The first priority in taking out money of the company is to offset the expenses one may have met personally e.g. mileage, travel, substance- these will be tax free. Corporation Tax of 20% is then deducted from the profits and the balance can be distributed further as dividends to the shareholders according to the ratio of their investment made in the company (payout ratio). Dividend income up to £2000 is tax free, no matter what non-dividend income one may have. If a dividend is accrued in the year end accounts but not paid, then it is considered as approved on the date when accounts were approved and can be shifted into a later tax year. Dividend tax rate and threshold for 2019/20:
Basic rate of 7.5% on taxable income over the personal allowance upto £37,500.
Higher rate of 32.5% on taxable income over the personal allowance from £37,501 to £150,000.
Additional rate of 38.1% on taxable income over £150,000.
This can be additionally confirmed through: https://www.gov.uk/tax-on-dividends
Payment of tax on dividends depends on the amount of dividend income in the tax year.
Dividends upto £10,000– Contact HMRC on contacting the helpline and ask them to change your tax code , however you do not need to tell the HMRC if your dividends are within your dividend allowance of £2,000 for the tax year.
Dividend over £10,000– File a Self-Assessment tax return. In case one do not send a tax return to HMRC, needs to registered by October 5 following the tax year. Register on:
https://www.tax.service.gov.uk/shortforms/form/SA1
There is no limit to the number of dividends a company may issue throughout the year or at any one time depending on the retained profit for a particular period. However the more dividend issued more paperwork it includes. Also one needs to take out considerable time on Self Assessment tax return, that’s why it’s advised to issue the dividend once in a year.
Get in touch here with our accountant
