How Often Can I Take Dividends From My Limited Company UK – A Guide

If you are a shareholder of a limited company in the UK, you may wonder how often you can take dividends from your company. Dividends are a way for companies to distribute profits to their shareholders, and they can be a valuable source of income for business owners. However, there are rules and regulations in place for issuing dividends, and it’s essential to understand the tax implications and best practices for taking them.

Key Takeaways

• Dividends from a limited company are a way to distribute profits to shareholders.
• There are rules and regulations surrounding issuing dividends, and it’s crucial to understand the tax implications.
• Best practices for taking dividends include considering factors such as personal allowances and the financial health of the company.
• Dividends can be taken in a tax-efficient manner by combining salary and dividend payments and using the tax-free dividend allowance.
• Proper documentation and reporting are essential for both the company and shareholders when issuing and receiving dividends.

Understanding Dividend Payments from Limited Companies

Dividends are a distribution of a company’s profits to its shareholders. Limited companies can pay dividends to their shareholders when they have profits available for distribution, a healthy balance sheet, and have met the necessary obligations and criteria.

They are declared by the company’s directors, who must ensure that the company can afford to pay them. Directors must hold a board meeting and pass a resolution to declare the dividend. 

The dividend payment is made from the company’s bank account to the shareholder’s account. The dividend payment is recorded in the company’s financial statements, and the net dividend income must be declared on the shareholder’s tax return.

The shareholder must keep the dividend voucher as evidence of the dividend payment. The company must also keep records of the dividends paid and the dividend vouchers issued to the shareholders. Keep these records for at least 6 years.

Shareholders who receive dividends are required to declare the dividend income on their self-assessment tax return. The amount of tax paid on dividends depends on the shareholder’s tax band.

It is important for limited company owners to understand the process of declaring and paying dividends. Proper documentation and reporting are necessary to meet legal requirements and avoid penalties. Consultation with an accountant or tax advisor is recommended in order to maximise tax efficiency and comply with all regulations.

Factors Affecting Dividend Frequency and Amount

When taking dividends from a company in the UK, there are various factors that can affect the frequency and amount of payments which include:

1. Dividend Payment: Take dividends as cash or a combination of salary and dividend. The combination of salary and dividend can be beneficial as it allows for tax-efficient income planning.
2. Tax Band: The tax band will determine the tax rate you pay on your dividend income. The basic rate tax band for the year 2021/2022 is £37,700, and the higher rate tax band is £37,701 to £150,000.
3. Amount of Dividends:  Determine the amount of dividends by paying out by the retained profit of the company. 
4. Personal Allowance: The personal allowance is the amount of money an individual can earn before they start paying income tax. For the year 2021/2022, the personal allowance is £12,570. Pay dividends tax-free up to this amount.
5. Personal Tax: The tax rate an individual pays on their dividend income will depend on their personal tax rate. For the year 2021/2022, the tax rate is 7.5% for basic rate taxpayers, 32.5% for higher rate taxpayers, and 38.1% for additional rate taxpayers.
6. Board Meeting:  Board of directors must declare the dividend funds at a board meeting. Record the minutes of the meeting and keep for future reference.
7. Dividend Declaration: The dividend declaration must include the amount of the dividend, the date of payment, and the names of the shareholders who will receive the dividend.
8. Retained Profit: Pay dividends out of the retained profits of the company.
9. Self-Assessment Tax Return: Shareholders must include any dividend income on their self-assessment tax return.
10. Annual Dividend: Shareholders can receive dividends on an annual basis.
11. Cash Dividends: Pay dividends in the form of cash.
12. Total Amount of Dividends: The total amount of dividends paid to shareholders cannot exceed the retained profit of the company.
13. Tax Due: Shareholders must pay tax on their dividend payments if they exceed the tax-free allowance.
14. Company has Sufficient: If the company has sufficient profits, pay dividends to the shareholders.
15. Company Directors: Company directors must pay income tax on any dividends they receive.
16. Annual Dividend Allowance: The annual dividend allowance is the amount of tax-free dividend income available each year. For the year 2021/2022, the annual dividend allowance is £2,000.
17. Many Limited: Many limited company owners choose to take a combination of salary and dividend payments for tax efficiency.
18. Choose to Take: Shareholders can choose to take dividends or reinvest them in the company.
19. Company has Enough: If the company has enough profits, it may choose to pay a dividend to shareholders.
20. Company to Pay: Declare dividends and pay in a tax-efficient way to minimise the amount of corporation tax payable by the company.
21. Must Pay: The company must pay the correct amount of tax on dividend payments.
22. Funds to Pay: The company must have sufficient funds to pay dividends to shareholders.
23. Financial Year: Pay dividends at the end of the financial year.
24. Tax-Efficient Way: Carefully plan and make dividend payments in the most tax-efficient way possible.
25. Amount of Corporation Tax: The amount of corporation tax payable by the company will depend on the amount of profits made and any deductions made for expenses.
26. Tax Planning: Tax planning can help to minimise the amount of tax paid on dividend income.

By considering these factors carefully, limited company owners can take dividends in a tax-efficient way while ensuring that the company remains financially healthy.

Best Practices for Taking Dividends from Your Company

When taking dividends from your company in the UK, it is crucial to do so in a tax-efficient manner. By following best practices, you can minimise your tax liability and optimise your financial gains. Here are some key factors to consider:

Understand Tax-Free Dividend Allowance

One of the most important factors to consider is the tax-free dividend allowance. The current tax year (2021/22) allows for up to £2,000 of tax-free dividends. For any dividends above this amount, you will need to pay tax on the excess amount.

Know the Dividend Tax Rates

The dividend tax rates in the UK vary based on the individual’s total income and tax band. The basic rate tax band allows for a 7.5% tax rate on dividend payments, while the higher rate tax band incurs a 32.5% tax rate. It is important to keep this in mind when determining the amount of dividends to take.

Understand Income Tax and National Insurance Contributions

When receiving dividend payments, it is important to understand the implications of income tax and national insurance contributions. Generally, dividend payments do not count towards national insurance contributions, but they do count towards income tax. Therefore, taking a combination of salary and dividend payments can help optimise your tax efficiency.

Be Tax Efficient as Possible