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UK dividend tax: A complete guide

September 15, 2022
Dividends. If you’re freshly self-employed, or have just set up your own limited company, you’ve probably heard that word. A lot.What exactly is a dividend? How much allowance do you get? Are there ways of being more tax-efficient?In recent years, the tax treatment of dividends has changed a great deal. So, it’s important to understand the current rates and rules.This article will cover it all — in a way that won’t leave your head sore.

What is a dividend?

Dividends are payments made to company shareholders. They come from a limited company’s profits — the money remaining after all expenses and liabilities (including Corporation Tax and VAT) have been paid.

Usually, dividends are distributed to reflect the percentage of company shares owned by each shareholder. For example, if you own half the company’s shares, you should receive 50% of a dividend distribution.Dividends aren’t counted as business expenses, and it’s illegal to pay a dividend if your company doesn’t have sufficient profit to cover the amount.

Are dividends tax-efficient?

Dividends are a tax-efficient way of getting money from your company. (That’s why it’s so handy to understand them!)The most tax-efficient way to pay yourself as a director is to take a lower salary, and then take dividends from your limited company. You get a personal dividend allowance each year which you don’t have to pay tax on. Dividends on shares held in an ISA are also tax-free.If you exceed your dividend allowance, the amount of tax you pay on your income from dividends is based on the tax band you’re in, otherwise known as your marginal rate. The tax rates on dividends are lower than Income Tax rates, making dividends are more tax-efficient option for limited company directors.
Neither the company nor you (as an employee) will need to pay National Insurance Contributions (NICs) on dividends. If you take a higher salary than the relevant National Insurance thresholds, then both employer and employee NICs would need to be paid.

Want to learn more about paying yourself as a business owner? Head over to our guide on paying yourself as a small business owner.

How to issue a dividend

If you’ve got enough profits after paying tax, expenses and liabilities, you might now be in a position to issue a dividend.Note: you can choose not to distribute any excess profits as dividends, if you like, instead saving your dividends for later. The accumulated profit can be distributed in future tax years, instead.To issue a dividend, you’ll need to hold a meeting of directors. There, you can “declare” the dividends.This meeting needs to be minuted; you must keep a record of it. Even if you’re the sole director of your limited company, issuing the correct paperwork is crucial.With each dividend payment, your company will need to issue a dividend voucher. This includes the following details:
    Company nameDate of dividend paymentNames of the shareholders being paid a dividendAmount of the dividend.
It’s best practice to give a copy of the voucher to all recipients and to keep a copy for your company’s records.
That’s quite a lot of admin. To make things easy, Ember allows you to pay dividends in one smooth, frictionless flow. Give us a go.

UK dividend tax rates for the 2022/23 tax year

The tax-free dividend allowance for this tax year (2022/23) is £2,000. You only have to pay tax on dividends above that amount.Once you exceed this allowance, and your personal income tax allowance (£12,570), dividends you receive will be taxed.To work out how much tax you’ll have to pay on dividends, follow these 3 steps:
    Add your income from dividends to all of your other income (e.g. employment, rental income, etc.) Work out your Income Tax band Pay tax on all your dividends based on the tax band you fall under
UK dividend tax rates for 2022/23 are:
Income Tax bandPercentage
Less than tax-free dividend allowance (£2000)0%
Less than your Personal Allowance (£12,570)0%
Basic rate8.75%
Higher rate33.75%
Additional rate39.35%
After you've used your £12,570 Personal Allowance amount, the following tax rates and tax thresholds apply:
Tax band 2022/23Dividend tax rateDividend total
Basic rate8.75%£2000-£37,700
Higher rate33.75%£37,701-£150,000
Additional rate39.35%£150,000+

How to pay tax on dividends

The shareholders that receive dividend payments may have to pay tax through their annual Self Assessment tax return.

On your tax return, you’ll need to declare the total dividend income you received, even if the amount is less than the dividend allowance. (You don’t need to declare dividends in ISAs, though.)You’ll also need to specify whether the dividends come from your own limited company, or another company you hold shares in.If you don’t complete a Self Assessment, but you receive dividends from companies where you aren’t a director, you can either:
    Ask HM Revenue and Customs (HMRC) to change your tax code if you are paid through PAYE If your total dividends are less than £10,000, contact the HMRC Income Tax helpline Or, if the amount is over £10,000, you'll need to complete a Self Assessment
Every business is different. If you’re unsure about how much tax to pay on dividends, or about the process itself, get advice from one of our accountants today.

Our team of qualified accountants can help you with any quirky tax and accounting queries, all the while structuring your business to be more tax efficient in the long run.

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