What the self-employed need to know about dividend tax and the dividend tax rate

Self-employed people who own a limited company might choose to pay themselves in dividends.

Many company owners choose to pay themselves using a combination of both salary and dividend payments. This is because it can be more tax efficient than simply paying yourself via Pay As You Earn (PAYE).

The tax you pay on dividend income depends on the income tax band you fall into.

All about the UK dividend tax

If you’re self-employed and own your limited company, you can take money out as a dividend.

You can only do this if your company has made a profit, and the dividends your company pays out can’t be more than its available profits for current and previous financial years.

So if your company doesn’t make a profit but you still need to pay yourself, you’ll need to do this via salary instead.

Keep in mind that dividends don’t count as a business cost when you’re working out your Corporation Tax.

And when it comes to dividend tax, it’s not paid by your company. It’s an income tax that you need to pay yourself, most likely through Self Assessment.

You should seek professional advice from an accountant if you’re wondering about the the best way to pay yourself.

Dividend tax rate

Each year, you get a dividend allowance. This means you only pay tax on dividends over that amount.

For the 2018-19 tax year, there was a big cut in the dividend allowance down to £2,000 (from £5,000 previously).

But remember that when you’re filing your tax returns for the 2017-18 tax year, you’ll receive the higher £5,000 allowance.

The tax you pay on dividend income over this allowance depends on the income tax band you’re in:

Income tax rate Dividend tax rate
Basic rate 7.5 per cent
Higher rate 32.5 per cent
Additional rate 38.1 per cent

You might pay tax at more than one rate, depending on your overall dividend and non-dividend income.

You also need to take your personal allowance into account, which is £11,850 for the 2018-19 tax year (£11,500 for 2017-18). Again, a professional can help you with your calculations.

Here’s an example of a self-employed person working out their tax liability for the 2017-18 tax year. They earn £11,500 as salary and £45,000 as dividends. The rates and allowances used are all for 2017-18:

  • £11,500 is tax free, because the personal allowance for 2017-18 is £11,500
  • £5,000 of dividends is tax free, because the dividend allowance for 2017-18 is £5,000
  • The next £33,500 is taxed at the dividend basic rate of 7.5 per cent
  • The final £6,500 is taxed at the dividend higher rate of 32.5 per cent

Paying tax on dividends

The way you pay tax on dividends depends on how much you earn as dividend income. Self-employed people will likely need to use their Self Assessment tax return.

  • If you earn up to £10,000 then you need to tell HMRC using their helpline, or ask them to change your tax code. Or you can use Self Assessment if you already fill one in
  • If you earn over £10,000 then you’ll need to put it on your Self Assessment

Paperwork when paying dividends

You should make sure your company follows the legal requirements when paying dividends, even if you’re the only shareholder.

You should hold a directors’ meeting to declare the dividend and keep minutes of the meeting. Make sure you keep the minutes in your records, because if HMRC were to investigate you, they could ask to see them.

You also need to write up a dividend voucher for each dividend your company pays. This can be electronic or a paper voucher. The voucher needs to show:

  • the date
  • the company name
  • the name and address of the recipient and the number of shares they own
  • the dividend amount

Again, be sure to keep good records when it comes to these dividend vouchers.

Be sure to speak to a professional accountant for more information about paying yourself in dividends.

Looking for self-employed insurance?

With Simply Business you can build a single self employed insurance policy combining the covers that are relevant to you. Whether it’s public liability insurance, professional indemnity or whatever else you need, we’ll run you a quick quote online, and let you decide if we’re a good fit.

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