Dividends

This is one of method how you can withdrawn money from a Limited Company as a Director or/and Shareholder.

In the article you will learn:

1. What Dividend is?

2. When will you receive the dividend?

3. How much can you get?

4. How much you will pay tax on?

5. Do you have to file Tax Return if you get dividend?

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1. What Dividend is?

As mentioned above, this is one of the ways in which Limited Companies pay money to all of its shareholders.

A shareholder is a person who holds shares in a Limited company.

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2. When will you get it?

You can only pay dividends when your company is profitable and solvent.

This means that if your company is losing (going negative) or its net profit is equal to £ 0.00, you cannot pay yourself any dividend.

SAMPLE 1

Turnover £50,000

Expenses £60,000

Company Loss -£10,000

You will not receive any dividend.

SAMPLE 2 Turnover £50,000

Expenses £40,000

Profit £10,000

Corporation tax 19% £1,900

Profit netto £8,100 (10,000 - 1,900) You can receive up to £8,100 of dividend.

SAMPLE 3

Turnover £50,000

Expenses £49,500

Profit £500

Corporation tax 19% £95

Profit netto £405 (500 - 95)

You can receive up to £405 of dividend.

You can pay dividends at the beginning of the financial period and at the end.

The company's financial period usually lasts 12 full months.

However, it should be remembered that if you withdraw them at the beginning, you assume in advance that the company will bring profits. If, at the end of the year, the company turns out to be loss-making or insolvent, you must either pay back the money you have withdrawn or treat it as a director's loan with a very high interest rate.

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3. How much will you get?

How much you can get depends on how many shares do you hold in the company.

Dividends are always paid to all shareholders depending on the number of shares.

For example: You cannot pay dividends only to two shareholders and the third one will not receive any dividend.

SAMPLE 1

Net Profit £50,000

3 shareholders

Peter has 10% of shares

Paul has 45% and Maria has 45%

Each of them will recive:

Peter £5,000

Paul £22,500

Maria £22,500

SAMPLE 2 Net Profit £50,000

2 shareholders and both have 50% of shares

Each of them will recive £25,000 of divedend.

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4. How much tax will I have to pay?

It depends on your income in tax year, which starts on 6th of April and ends on 5th of April.

Please note that a Limited Company's tax year may be different from an individual's tax year.

First £2,000 of dividends is free of tax (dividend allowance).

How much tax you pay on dividends above the dividend allowance depends on your rate:

Basic rate 7.5%

Higher Rate 32.5%

Additional rate 38.1%

Remember that there is still a personal allowance, which in 2020/21 is £12,500

SAMPLE 1

You receive dividend £15,000

Tax Free Allowance £12,500

Dividend allowance £2,000

Taxable amount £500

Tax to be paid £37.50 (£500 *7.5% tax)

SAMPLE 2

You receive employment income £13,000

You receive dividend £5,000

Tax Free Allowance £12,500

Dividend allowance £2,000

Taxable employment income £500

Taxable dividend £3,000

Employment tax to be paid £100 (£500 *20% tax)

Dividend tax to be paid £225 (£3,000 *7.5% tax)

Total Tax to be paid £325

Please note that you must include dividend when it's issue by the Limited Company, not when you actually received the money into your personal account.

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5. Do I have to file Tax Return?

No - if the only dividends you received is in the dividend allowance -TY 2020/21 £2,000

No - if the dividend is below £10,000 you can contact HMRC to change your tax code, or you can file a tax return if you have filed one before.

Yes - if you received over £10,000 of dividends.

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Have any questions or concerns?

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