Limited Company guide to dividends

Understanding dividends as a Limited Company director can help you increase your tax efficiency and maximise your take-home pay. Whilst we recommend speaking to your dedicated accountant for specific advice, knowing a little bit about dividends yourself can be handy.

In this blog, we’ll cover the basics surrounding dividends that you need to know as a Limited Company director.

What are dividends?

Dividends are the distribution of company profits among its shareholders. Salaries and dividends are taxed differently, which is why many Limited Company directors will pay themselves a salary and supplement the rest of their income with dividends.

You can also add your spouse as a shareholder in your Limited Company, allowing you to withdraw more tax-free income.

When can you draw dividends?

As long as you have enough profit in your Limited Company, you can draw dividends whenever you like, although it’s most common to do this monthly, quarterly, or annually.

If your company does not have enough profit when you draw a dividend, this would be considered an illegal dividend or director’s loan and could lead to an investigation by HMRC.

In addition, you need to ensure you are keeping proper records of all the dividends you draw so HMRC can’t class them as a ‘disguised salary’.

You must also document your decision to declare a dividend through minutes, and you must provide shareholders with a dividend voucher, which creates a clear audit trail. Be sure to keep hold of these dividend vouchers as they are required for your annual tax return.

What are the tax and National Insurance Contribution (NIC) implications?

Dividends don’t incur NICs. As a result, the most tax-efficient way to pay yourself as a Limited Company director is usually with a low salary and high dividends.

The dividends you receive are taxed as personal income, with a tax-free allowance of up to £500 per person. These are the current tax thresholds for dividends:

• Basic rate: taxed at 8.75% – (up to £50,270)
• Higher rate: taxed at 33.75% – (from £50,271 to £125,140)
• Additional rate: taxed at 39.35% – (over £125,140)

It’s important to note that dividends are taxed at the point of declaration, not when they are drawn. For example, declaring a dividend payment on 1st April 2024 will be included in your 2023/24 tax return, even if you aren’t paid the dividend until the 7th. Timing your declarations right could be the difference between being pushed into a higher tax bracket or not.

If you are unsure of whether or not to declare a dividend, consult your Limited Company accountant, who will be able to help you assess the situation.

Final thoughts

By using dividends, you can make the most of your personal allowances. By paying yourself a salary that doesn’t use up all of the basic rate and using dividends to take the rest of your payment, you can make use of the lower tax rate, all without increasing your NICs.

Every director’s circumstances are different and knowing when and how to take dividends whilst remaining tax efficient can be difficult. That’s why we recommend getting advice from your accountant before withdrawing money from your business, so you know all your options and their tax implications. By doing this, you’ll also ensure you’re remaining compliant and following all the regulations.

If you’re looking for an accountant to help you with your dividends, our team of expert accountants here at Aardvark Accounting are here to offer tailored advice to help you maximise your take-home pay. Get in touch today to find out how we can help you.