Dividend

A dividend is a sum of money that you might receive if you own shares in a profitable limited company. Only limited companies can pay them. If you’re a sole trader, you won’t be able to extract dividends as income from your business.

In order to pay shareholders dividends, the limited company directors have to all get together to “declare” the funds that they’ll be releasing. The payment can only come out if the company makes a profit – and it’s deducted after Corporation Tax and VAT. Dividends are a very tax efficient method of extracting income from a company.

Dividends are taxable, however they are taxed at a different rate to your normal income. See our table below to see the tax charges on your dividends, depending on your total income of salary and dividend.

Annual salary Tax bracket Tax rate
Up to £12,570 Personal allowance 0%
£12,571 – £50,270 Basic rate 8.75%
£50,271 – £125,140 Higher rate 33.75%
£125,140+ Additional rate 39.35%

How do I pay tax on my dividends?

Your method of paying tax on your dividends is dependent on the amount you earn in dividends that year.

  • If you earn between £1,000 and £10,000, you can either do a Self Assessment tax return or pay through your PAYE tax code
  • If you earn over £10,000 from dividends, you have to file a Self Assessment tax return

 

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