Running your own business can be a busy job, but when things are going well you are able to reap the benefits. Business owners are able to take a portion of the company’s profits and pay it to themselves and other shareholders as dividends. As a business owner, it is important to bear in mind that you must pay tax on dividend payments you make, so there are a few things to consider when paying these out. Allow us to go into more detail regarding how often you can take dividends and when might be the best time to do so.
What is a dividend?
When a company has paid all its expenses, corporation tax, and any other liabilities, anything that is left over is classed as profit. A business owner is free to do what they wish with this, whether they reinvest it into equipment, keep it in the company bank account, or decide to pay dividends to shareholders or themselves. There is no limit to the number of dividends that can be taken from company profits, but you may want to leave some of your profits to cover any day-to-day costs or any other activities such as investing in growing your business. If your company has no retained profit but dividend payments are made, this can leave you in trouble with HMRC and you could suffer penalty charges.
When is the best time to take dividends?
There are no rules on how often you can pay a dividend, although taking these out randomly may make financial planning slightly more difficult. Therefore, it is recommended that you do this on a quarterly or bi-annual basis after your profits have been calculated. All companies must hold a board meeting with their shareholders to decide dividend payments.
Tax regulations
It is important to bear in mind that the profits of your business and the amount of dividends you take out can have a large influence on the amount of tax you will be liable to pay.
- HMRC allows tax free dividends up to a certain amount, the most recent 2021/22 tax year being £2,000.
- Any other dividends paid on top of this amount are classed as taxable income, with the amount you must pay depending on your tax band.
- For the 2021/22 financial year, any dividend income between £2,000 and £37,700 must be paid at a 7.5% tax rate. Above this up to £150,000 is 32.5%, then anything above this is 38.1%.
- It is essential for shareholders to declare any dividend payments they receive in their self-assessment tax return and pay tax accordingly, which is why dividend vouchers are distributed.
- If you can’t prove money received is dividend income, HMRC could consider it a salary payment and tax you at a higher rate as a result.
- Business owners often pay themselves a combination of salary and dividend payments in order to be more tax efficient.
If you require assistance with your company dividends, whether they are paid to yourself or other shareholders, you can rely on our expert team of accountants at Omer & Company. Our complete accountancy services can help you organise your dividend and salary payments, in order to ensure your business is as tax efficient as possible. If you would like to discuss how we could help your business, give us a call on 020 8850 0700 or email info@omeraccountants.co.uk.
