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Self-employed people who own a limited company might choose to pay themselves in dividends. But what is a dividend exactly?
A dividend is money paid to shareholders out of a business’s profits. 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 through Pay As You Earn (PAYE).
Paying tax on dividends depends on the income tax band you fall into.
If you’re self-employed and own your limited company, you can take money out as a dividend, or you may receive a dividend payment if you own company shares.
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 through a salary instead.
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 best way to pay yourself.
Each year, you get a tax free dividend allowance. This means you only pay tax on dividends over that amount. The allowance remains at £2,000 for the 2021-22 tax year, so any dividend income of £2,000 or less will be tax-free.
The tax you pay on dividend income over this allowance depends on the income tax band you’re in. And from April 2022, the rates are to increase by 1.25 percentage points to help pay for health and social care.
Income tax rate
Dividend tax rate 2021-22
Dividend tax rate 2022-23
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 £12,570 for the 2021-22 tax year (£12,500 for 2020-21). Again, a professional can help you with your calculations.
Read more about self-employed tax changes for 2022-23.
Here’s an example of a self-employed person working out their tax liability for the 2021-22 tax year. They earn £12,570 as salary and £50,000 as dividends.
In the 2021-22 tax year:
In the government's Autumn Statement, the chancellor announced changes to the amount of dividends that will be tax-free.
The current rate of £2,000 will be reduced to £1,000 from April 2023-24. Then it will be reduced further in 2024-25 to £500.
This means that more of your dividends will be exposed to the basic rate of tax.
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’re putting it in your Self Assessment, you’ll need to register by 5 October following the tax year you had the income. The deadline for filing your tax return is 31 January.
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. The voucher needs to show the:
Again, be sure to keep good records when it comes to these dividend vouchers.
You should also speak to a professional accountant if you need more information about paying yourself in dividends, or need a dividend tax calculator.
We create this content for general information purposes and it should not be taken as advice. Always take professional advice. Read our full disclaimer
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