Limited Company Dividends

Dividends are distributions of profit and can be paid to shareholders after the company has accounted for corporation tax at 21% on the company profits.

If your contracts are assessed as not caught by IR35 (outside) then it can be more tax efficient to take part of your remuneration as a dividend as opposed to salary. This is because dividends, unlike salary payments, are not subject to either Employees or Employers National Insurance.

Taxation of dividends

To prevent double taxation of the company profits and personal income tax on dividends a ‘tax credit’ of 10% is ‘attached’ to dividend payments. This means on a £9,000 net dividend there is a £1,000 tax credit making a total gross dividend of £10,000. See example below

Net Dividend£9,000Amount paid to shareholder
Tax Credit£1,00010% of gross dividend
Gross Dividend£10,000Total income for income tax purposes

Please note: when calculating your total personal earnings you use the gross dividend including the tax credit.

Depending on your total income there may be additional personal tax due on dividends. The additional tax charge is calculated on your self-assessment tax return and is payable on 31 January following the tax year in which it was earned. So additional tax due on dividends received in the tax year ended 05 April 2011 is payable on 31 January 2012.

Basic rate taxpayers (gross earnings below £43,875pa) pay no more tax on dividend income. Higher Rate taxpayers (gross earnings above £43,875pa) pay additional personal tax on dividend income. The additional tax is at a special dividend rate of 32.5% of the gross dividend less the10% tax credit.

A simpler way of calculating the additional tax is to take 25% of the net dividend, in the example above, this would be £9,000 x 25% = £2,250. If your total income (salary + gross dividends + income from other sources) exceeds or is likely to exceed £43,875, it is very important to make sufficient provision to pay the additional personal tax when it falls due. In arriving at your total income you must include your total income from all sources e.g. previous employment, rental income, bank interest, other investment income or pensions.

The table below shows the amount of dividends you can receive before you pay any further tax on the dividend based on various levels of salary. It assumes the full tax year 2010-11 and that there is no other income except salary.

Annual Salary (Gross)Approx. Dividends (Net) before further tax payable

Irrespective of the table above we recommend you put aside 25% of each net dividend you take, as this will ensure you have sufficient funds available to meet your personal tax liabilities due on your company dividends. This is a worst-case scenario but will ensure you have more than sufficient funds available to meet any additional tax due on dividends.

Please note: Depending on your personal circumstances there may be further tax due on income from other sources e.g. rental income received as a gross payment.

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