Finance

How Much Dividend Can I Pay Myself?

Allison S Robinson | 28 March 2022 | 2 years ago

How Much Dividend Can I Pay Myself

How much dividend can I pay myself? This is a commonly asked question among business owners. In the UK, you can pay yourself a dividend from the company you own. This is a payment made to shareholders out of profits, and it’s a great way to take money out of your business without having to pay income tax.

But are there any regulations concerning dividends? And will you really earn more paying yourself this way?

In this article, we’ll explain everything you need to know about paying dividends in the UK so you can maximise your company’s profitability.

What is a Dividend?

A dividend is a distribution of profits made by a company to its shareholders. This can be in the form of cash or shares, and it’s typically paid out quarterly. Companies will often offer a dividend as an incentive for investors to buy shares, and it’s also seen as a way to reward shareholders for their loyalty.

In the UK, there are two types of dividends:

  • An interim dividend – Paid out before the company’s financial year-end.
  • A final dividend – Paid after the company’s accounts have been approved by shareholders.

Which Companies Can Pay Dividends?

In the UK, any company limited by shares can pay dividends. This includes public limited companies, private companies limited by shares and unlisted public companies.

If you’re a sole trader or in a partnership, you can’t technically pay yourself a dividend as there’s no legal entity to do so. However, you can take money out of the business via other methods such as salary or drawings.

How to Pay Out Dividends

Paying dividends is a two-step process:

  1. Your company declares the dividend – This is done at a board meeting, and the directors will vote on whether or not to pay a dividend. If the decision is made to go ahead, the directors will need to set a date for when it will be paid.
  2. Payment is made – Dividends are typically paid out quarterly, but they can be paid more or less frequently. The money will be transferred from your company’s bank account to your account on the date that was set.
It is very important that HMRC is notified of any dividends that are paid out by your company. This can be done via the online service, and you’ll need to provide information such as the amount of the dividend, the date it was paid, and who received it.

You also need to keep records of all dividends you are paid so that you can declare them on your Self-Assessment tax return.

dividend taxes

Tax-Free Allowance

In the UK, you have a personal tax allowance of £12,500 which is the amount of money you can earn before you start paying income tax. On top of this, there’s also an additional dividend allowance of £2,000. This means that you can earn up to £14,500 in dividends without having to pay any tax on the earnings.

However, it’s important to note that this allowance is only for dividend income – you’ll still need to pay tax on other sources of income such as salary or interest from savings.

The Tax Brackets After That

Once you start earning more than £14,500 in dividends, you’ll need to start paying tax. The amount of tax you pay will depend on which tax bracket you fall into:

  • Basic rate – 7.5% (for dividend earnings between £14,500 and £50,000)
  • Higher rate – 32.5% (for dividend earnings between £50,001 and £150,000)
  • Additional rate – 38.1% (for dividend earnings above £150,000)
If we compare that to the tax rates for income you can see why receiving money through dividends rather than through a salary can be beneficial:

  • Income tax basic rate – 20% (for income between £12,500 and £50,000)
  • Income tax higher rate – 40% (for income between £50,001 and £150,000)
  • Income tax additional rate – 45% (for income above £150,000)
As you can see, the rates for dividend tax are lower than the corresponding rates for income tax so you could potentially make a lot more money.

When Are You Allowed to Pay Dividends?

Your company can only pay dividends if it’s profitable and has enough cash to cover the payment. This means that you can’t pay dividends if your company is loss-making or doesn’t have enough money in the bank.

The directors of the company also have a responsibility to make sure that the dividend is fair and reasonable. This means taking into account things like the company’s current financial position, future prospects, and any other commitments that it has.

It can damage your company’s reputation if you are seen to be paying huge amounts of dividends out to shareholders whilst the company is loss-making or has other financial problems.

Why Dividends Can Be Better Than Salary

There are a few reasons why you might want to pay yourself via dividends rather than salary:

The first reason is that, as we’ve seen, the tax rates for dividends are lower than the corresponding rates for income. This means that you could potentially make more money by taking dividends rather than salary.

The second reason is that dividends are only paid out of profits, so you’re not taking money away from the company that could be used to invest in things like new products or staff.

The third reason is that dividends can be a good way to reward yourself for the work you’ve put into the company. If the company is doing well, then you’ve played a big part in that and so it’s only fair that you should benefit from it.

Example Scenarios

Here are a few example scenarios to show how this might work in practice:

Scenario One: You’re a sole director and shareholder of a company that made a £50,000 profit last year. You decide to take the full £12,500 personal allowance as salary and the rest as dividends. You then get an additional £2,000 tax-free dividend allowance. This means you’ll pay tax on £35,500 of dividend income at the basic rate of tax (7.5%), which comes to £2662.50.

Scenario Two: You’re a shareholder of a company that made a £100,000 profit last year. Again, you take the full £12,500 personal allowance as salary and the rest as dividends. You’ll pay tax on £85,500 of dividend income at the higher rate of tax (38.1%) which comes to £32,657.50.

In neither example will you have to pay any income tax or National Insurance Contributions even though you’ve received a significant amount of money from the company.

A Summary of the Pros and Cons of Paying Yourself Dividends

There are a few pros and cons to taking dividends rather than salary:

Pros

  • You can potentially make more money as the tax rates on dividends are lower than for income.
  • Dividends are only paid out of profits, so you’re not taking money away from the company that could be used to invest in things like new products or staff.
  • Dividends can be a good way to reward yourself for the work you’ve put into the company.

Cons

  • You may have to pay more tax if the company makes a loss in future years as you’ll no longer be able to offset losses against your salary.
  • Dividends are paid on post-tax profits so you can’t use them to reduce your overall tax bill.
  • Dividends can only be paid by certain types of businesses so you may not be able to take them if you’re self-employed or a sole trader.
board of directors

Director’s Role in the Decision

The decision of whether or not to pay dividends is ultimately up to the directors of the company. They will need to take into account the company’s financial situation, its future plans, and the tax implications of paying dividends.

They will also need to consider the needs of the shareholders and whether they would prefer to receive a dividend or have the company reinvest profits back into the business. If you’re a shareholder, then you should contact the directors of the company to discuss your preferences.

The Difference Between Dividends and Directors Loan

A director’s loan is when a company loans money to a director. This money can be used for personal or business purposes. A dividend is a payment made by a company to its shareholders out of profits with no repayment necessary. As dividends can only be paid by profitable companies, any payment made that isn’t covered by profits is automatically a loan. Director’s loans are not tax-free and must be declared on a director’s personal tax return.

Business Taxes on Dividends

You also need to figure corporation tax into your calculations. All companies must pay corporation tax on their profits at a rate of 19% for most companies.

Let’s say you are the owner and main shareholder of a business that makes £100,000 profit. You decide not to pay yourself a salary but instead take £50,000 in dividends. This means you will need to pay 32.5% on £48,000 (£15,600) as well as £19,000 in corporation tax. So in total, you will pay £34,600 in taxes which is a tax rate of 34.60% leaving you (and your company) £65,400.

Now imagine you are the owner of the same company but you pay yourself a salary of £40,000 and take no dividends. This means you will pay 20% tax on £27,500 which is £5,500. Your company will also pay £19,000 in corporation tax which means your total tax for the year will be £24,500 leaving you (and your company) £65,500.

As you can see, in this example, it would be better for you to take a salary rather than dividends because the combined earnings of you personally and you as the business owner will be higher, assuming no other shareholders receive dividends that year. This is why it is important to have a good understanding of the tax implications before making any decisions.

Paying Dividends vs Reinvesting Profits

Another thing to consider is whether you would be better off reinvesting profits back into the business rather than paying them out as dividends. This will depend on a number of factors including the company’s financial situation, its future plans, and your personal tax situation.

If the company is in a strong financial position and has good growth prospects, then reinvesting profits back into the business could be a better option as it will help the company to grow and generate more profits in the future. This could eventually lead to higher dividends being paid out to shareholders.

However, if the company is not in a strong financial position or has limited growth prospects, then paying out dividends could be a better option as it will provide shareholders with a return on their investment.

It is also worth considering your personal tax situation as reinvesting profits back into the business could result in you paying more tax in the future. This is because any gains made from the sale of shares in the future will be subject to capital gains tax.

How to Get Advice on Paying Dividends

If you are unsure about what option is best for you, then it is advisable to seek professional advice. An accountant or tax advisor will be able to advise you on the best course of action based on your individual circumstances.

They can look at your company’s financial situation, future plans, and personal tax situation to help you make an informed decision. The most important thing is that you don’t sacrifice long-term growth prospects in favour of short-term gains. Many businesses make this mistake and end up regretting it later down the line when they don’t have enough money to keep the business afloat.

dividend profits

Final Thoughts

As you can see, the short answer to the question “How Much Dividend Can I Pay Myself?” is “As much as you like!” However, there are a number of things you need to consider before making any decisions.

Paying dividends can be a great way to generate extra income but it is important to understand the tax implications first. Seek professional advice if you are unsure about what option is best for you so that you don’t end up making a mistake that could put your business in jeopardy. Whatever you decide, it is very important that you follow the rules correctly and declare all dividends to HMRC or you could face severe penalties.

Topic

Finance

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