If you are a director of a limited company. There are a few different ways of getting paid. One of which is through a salary, which sometimes can be far from the most tax effective way. And the other is by getting paid through dividends. And it’s this we’re going to be focusing on today.
So what are dividends?
Well, you’ve probably heard the phrase being bounced around in the world of business before. They are essentially payments that are made to shareholders of a company following corporation tax. If you are running a limited company one of the most tax-efficient ways is by getting paid through dividends.
How can I issue dividends from my limited company?
If you want to pay dividends from your limited company to either yourself or other shareholders, you will need to call and hold a meeting of directors of a company so that you can ‘declare’ the dividend. It’s important also that this meeting is minuted thoroughly and any records kept safe. Once you have declared the dividend you then need to create and keep a dividend voucher that shows the following information on it:-
- The date that the dividend has been paid
- Your company name
- Names of the shareholder(s) that are being paid through dividends.
- Amount of the dividend being paid.
Once you have created a voucher you should also provide a copy to all recipients of that particular dividend.
Why is it the most tax-efficient way of getting paid?
When paying directors/shareholders through dividends your limited company doesn’t have to pay any tax on any of these dividends. However, those in receipt of these dividends may be subject to be paying tax on these payments. This can vary depending upon that individual’s personal situation and they will find out when they do their annual self-assessment.
However, in comparison to paying yourself a salary, it’s a lot more efficient. The reason for this is if you pay yourself a salary that is above the NI thresholds both yourself as the employee and as the employer would both be subject to tax.
What is the dividend tax threshold?
In the 2021/22 tax year, you can earn up to £2,000 in dividends before you are subject to any income tax on these dividends. It should be noted that this is far higher than your personal tax allowance should you be paying yourself a salary.
Want to know more?
If you run your own limited company, or if you’re looking to start and want to know more about getting paid through dividends and to ensure you’re getting paid through the most tax-efficient method possible, get in touch with a member of our team for a chat here at D&K Accounting, your team of profit-first professionals.