When it comes to the benefits of contracting through your own limited company, you’ll often hear dividends mentioned quite frequently. But what exactly are dividends? Lets start at the beginning. First things first . . .

What are dividends?

A dividend is a payment of profit from a limited company to its shareholder/s. Dividend payments can be made in addition to the salary taken, but more on this later. This is the money remaining in a company after all business expenses and liabilities, including tax and VAT, have been paid.

Who are dividends for?

Dividends are paid to shareholders of the limited company. For the purposes of this article and simplicity, let’s assume that your company has one owner and one shareholder, i.e. you!

For ordinary shares, the amount of dividends a shareholder can receive is based on the percentage of shares owned, so if you are the only shareholder you’ll receive 100% of each dividend. Every year you get a dividend allowance, currently £1,000 in the tax year 2023/2024, which is tax free.

How do you declare a dividend?

Regardless of how many shareholders there are, a dividend needs to be declared with a dividend voucher. This should be kept on records for the business (the limited company doesn’t need to keep the dividend vouchers as it will have been recorded in the minutes) and shareholder/s. A ‘directors meeting’ will need to be held (yes even if it is just yourself as the shareholder!) to agree on a dividend declaration and record minutes of the meeting.

This voucher can be sent by email, paper or generated by any number of accounting software packages. While there is not a standard template, there is some key pieces of information that need to be included. These are:

  • The date
  • The company name
  • The name and address of the relevant shareholder/s
  • The total number of shares owned
  • The total dividend payable
  • The director’s signature

The dividend voucher is a log for your reference. It is also something that can be requested should HMRC have any questions. If not ‘declared’ correctly these could be treated as unlawful and in contravention of the Companies Act. So always ensure to declare dividends regardless of how tedious it may seem for one person (if this is the case).

You can also choose not to pay yourself dividends and simply leave the profit in the company’s bank account. It is always worth speaking to your accountant before making any decisions for advice on what is best for you and your business.

What is the advantage of dividends?

There can be a definite tax advantage in paying yourself through PAYE (salary) AND dividends. Usually the most tax effective combination is taking a low salary and a higher dividend, this is because:

  • You do not pay National Insurance Contributions on dividends
  • You can minimise your personal tax liability (depending on the level of dividends you pay yourself)
  • Taking a salary above a certain level will count towards your state pension and other state benefits
  • Your salary is a tax deductible expense and so reduces your company’s corporation tax
  • You can pay yourself in dividends up to the level of post-tax profit in your company

The real benefit, which your accountant can explain to you further and in more depth, is the fact that you can control when funds are removed from your business and the timing of the tax. That sort of control enables you to run your business as efficiently and effectively as possible.

Do you have a question about dividends?

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How often can you take dividends?

You can actually take dividends as often as you wish, assuming the profits are available in the company, however it’s considered good practice to set up a monthly or quarterly payment. Being able to decide when, and how much, to pay dividends is one of the perks of being a contractor with a limited company.

What are the thresholds for dividends and the tax applied?

For the 2023/2024 tax year, there is a tax-free dividend allowance of £2,000. In other words, you can take up to £2,000 in the 2023/24 tax year before you must pay any income tax on it. This is in addition to your personal tax-free allowance which is £12,570. If your combined salary and dividend income exceeds £14,570 (the two allowances added together) then you will need to pay tax as follows:

  • Basic-rate taxpayers –  will pay 8.75% (i.e. if you receive dividends up to a value of £50,270)
  • Higher-rate taxpayers –  will pay 33.75% (i.e. if you receive dividends over £50,270 and under £125,140)
  • Additional-rate taxpayers – will pay 39.35% (i.e. if you receive dividends of £125,140 and over)

So how does this work in practice?

A working example of dividends based on £12,570 in salary and £50,000 in dividends: 

  • The £12,570 that you pay yourself is consumed by your personal allowance
  • The first £2,000 of your £50,000 in dividends is consumed by your 0% dividend allowance
  • The next £35,700 of dividends that you drew from your company is taxed at the basic rate of 8.75%, which is £3,123.75
  • The remaining £12,300 is then taxed at the higher rate of 33.75%, which equals £4,151.25
  • Therefore, your total dividend tax liability is £7,275.

In most circumstances the combination of withdrawing a small salary and dividends is the most-tax efficient way of withdrawing funds from the company. As any good accountant would advise, from the beginning ensure you have the correct structure in place to maximise on this benefit and you will be running a smooth, tax efficient business.

Our team of fully qualified accountants are on hand to help every step of the way. For further advice call 0207 096 2659 or request a call back at a time to suit you. Alternatively, why not take a look at our Salary vs Dividends Guide – a full breakdown on what combination will best suit you.

Why choose Integro Accounting?

Integro Accounting provide a fixed fee limited company accountancy service to contractors, freelancers and consultants. Integro accounting was founded on the word integrity. Clients rate us 5/5 on Google and we pride ourselves on building a completely transparent and personal relationship with our clients.  For just £110 + VAT per month, you can have a partner integral to your contracting career.

  • All-inclusive price – no hidden charges, one comprehensive package.
  • A dedicated accountant – one person who will support you every step of the way.
  • Unlimited face to face meetings – offices available across the UK.
  • FREE award-winning accountancy software – a FreeAgent licence provided to all clients.
  • 24/7 access to your accounts – complete visibility of your accounts whenever and wherever you are.

Speak to one of our expert accountants today on 0207 0962659 or email christian@integroaccounting.com for more information on how we can help you.