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Dividends – tax-free allowance reduced

Since several reforms to dividend taxation in recent years, taking dividends is no longer as tax-advantageous an option as it once was.

The most recent change to dividends came into effect on 6 April 2018, when the tax-free allowance was reduced from £5,000 to £2,000.

How are dividends taxed?

Though the allowance has changed, tax rates on dividends have remained the same for 2018/19. The amount you’re taxed will depend on your income tax band.

For dividend-only income, the following tax rates apply:

 

Annual slice of income (2018/19)

Tax rate

Up to £11,850

Nil

£11,851 – £13,852

0%

£13,853– £46,350

7.5%

£46,351– £150,000

32.5%

More than £150,000

38.1%

 Paying dividends

Before dividends can be paid, you’ll need to deduct any expenses as well as corporation tax from the company’s profits.

This calculation is important, as it is illegal to pay out more than is available from the company’s profits.

After this has been done, you’ll need to distribute dividends to shareholders. All shareholders in the same share class will need to be paid equally.

If you are the only shareholder, you can take as much of the available profits as you choose.

Even so, it’s best to think carefully about how much you need. Any withdrawal will be taxed in some way, so it may be better to leave some of the profits where they are.

What are your options?

Many owner-directors take a combination of salary and dividends.

Drawing a salary of just over £8,000 is a common approach, as it allows you to build up national insurance contributions, giving you access to the state pension and certain benefits.

For example…

Emma owns a limited company, and is the only shareholder. She takes a salary of £8,424, leaving an unused personal allowance of £3,426.

She has £50,000 of available profits, after corporation tax and other expenses have been deducted.

If she decides to take all of the profits out of her company, the taxation of her dividend income is calculated as follows:

 

 

Income

Taxed at

Tax

After tax

Remaining personal allowance

£3,426

Nil

Nil

£3,426

Dividend allowance

£2,000

0%

0%

£2,000

Basic rate

£32,500

7.5%

£2,437.50

£30,062.50

Higher rate

£12,074

32.5%

£3,924.05

£8,149.95

Total

£50,000

 

£6,361.55

£43,638.45

 Including her salary of £8,424, Emma takes home £52,062.45.

Talk to us

We’re happy to discuss your options for taking dividend income.

If you have any questions about how the allowance affects you or would like more information about our tax planning services, contact tracya@knightandcompany.co.uk or call 01628 631 056.