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How are limited company dividends taxed?

Posted 17 Aug 16

Upon incorporation with Companies House, limited companies become individual legal entities. This means that all business finances and assets belong to the company and not its owners. As a company owner you cannot simply remove money from the business in the same way as a sole trader can.

In order to ensure the process follows the legal requirements, you need to comply with specific procedures to record and account for all money going into and out of the company’s bank account. You need to ensure that you do not take more than the profit that remains after tax and other financial liabilities have been accounted for.

One of the ways in which you can take out money out of a limited company is through dividend payments. In order to claim dividends you need to be the company shareholder. Dividends are paid after the deduction of all costs, expenses and business taxes for the current financial year, and after considering all retained profits and loss from previous financial years. If your company doesn’t have any profit after these considerations, a dividend payment will be classified ad an illegal dividend which can lead to HMRC investigation and penalties.

As with all payments, you will need to pay taxes for your dividends to HMRC through the self assessment tax return system each year.

From April 2016 some major changes have taken place in the way dividends are being taxed. Your first £5,000 of dividends will be tax free, however, any dividends above that but still in the basic tax band (up to £43,000 for 16.17) will be charged at 7.5%. Dividends in the higher tax band will be charged at 32.5%. Furthermore, additional dividend tax rates apply at the upper rate of tax.

As a limited company owner you have a complete control over distribution of your dividends. As long as the sum of the dividends distributed in your company year does not exceed the amount of profit your company has made, you can pick the amount and the time when the dividends are declared. However, like with all aspects of running a successful business, routine is often a key to success. Your accountant might suggests processing dividend payments on a monthly or quarterly basis, to keep record-keeping simple and to avoid any future mistakes and confusions.

Although some changes in the dividend allowance have made limited company a less attractive options for those who hope for tax savings, there are other reasons why we encourage our clients to choose this structure over sole trading. Furthermore, there are ways you can lower the negative impact the dividend allowance changes might have on your business. Before making any decisions, you should discuss all the options with your accountant, who based on your individual situation will create a financial strategy to keep your company on top.

If you are unsure what tax you should be paying on your dividends, contact our expert accountants at Tawanda Accountant and we will dissolve any doubts and worries you might have.