Company formations

What Are Limited Company Dividends?

When a limited company has traded at a profit, those profits will be taxed at the applicable rate and then may be distributed to the shareholders of the company.

Calculation

In order to work out how much, if any, dividends will be payable to your shareholders from your limited company’s profits, use the following calculation: take the total amount of your turnover and for the year, and deduct all the company expenses from that figure. What you will then be left with is the company’s gross profits. This amount will then be taxed at the current Corporation Tax rate, which is at present 21% for small companies (£300k turnover or less.)

Once you have subtracted 21% from this figure, this will be your limited company’s post tax profits which can be divided up and distributed to shareholders. Shareholders will receive an amount that is commensurate with their stake in the business.

Timing and Documentation

There are no hard and fast rules on when you should distribute your limited company dividends. Larger companies tend to undertake distribution on a quarterly basis, but you may decide to do it more frequently if it would assist with your cash flow.

f you are distributing limited company dividends  it is important to be aware of and to comply with the documentary requirements as prescribed by law. Every time you declare a dividend, you must prepare minutes of a company board meeting.

Each of your shareholders must be given a dividend voucher that details the amount of dividend paid to them, including the 10% tax credit that applies to all dividends from UK companies. This tax credit recognizes the fact that the company profits have already been taxed previously by virtue of Corporation Tax.

Shareholders

Once a shareholder receives dividends from a limited company in which they have a stake, they may be liable to pay tax on this income. How much tax must be paid depends on whether they are a standard or higher rate tax payer – in other words, it depends on how much they earn before receiving dividend payments.

Individual Taxation

If a shareholder is a standard rate taxpayer, they will be taxed at the standard dividend tax rate which is 10%. Higher rate taxpayers are subject to a rate of 32.5% dividend tax. In practice, lower rate taxpayers pay nothing because of the 10% tax credit applied to all UK limited company dividends, and those on the higher rates pay 22.5%.

It may be the case that a shareholder pays some tax at lower rates and other tax at higher rates. If for example, income from their job means that they earn exactly £1000 less than the threshold level for higher rate taxation, but they receive dividends of £2000, half of this will not be subject to taxation (because of the 10% tax credit) and the other half will be taxed at 22.5%. If you have questions about how much tax you will have to pay, ask your accountant to help you.

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