How to pay yourself dividends from your limited company

How to pay yourself dividends from your limited company

As a limited company owner, one of the most tax-efficient ways to pay yourself is through dividends.

Paying yourself through dividends involves several straightforward steps: calculating company profit, holding a Director’s Meeting, documenting and storing the minutes, producing a dividend voucher, and declaring the dividend. You can distribute dividends at any time, provided your company generates enough profit to cover these payments after Corporation Tax.

This article explores the process of paying yourself dividends, the tax implications, and why combining a salary with dividends can be highly beneficial.

Get in touch with our limited company accountants for more advice today.

When can you start to pay dividend income?

You can pay or distribute dividends at any time and frequency during the year, as long as your company is generating enough profit to be able to pay those dividends.

However, you do need to ensure that all the respective dividend payments are covered solely by your company’s profit net of CT (Corporation Tax).

Apart from deciding on when and who to pay dividends to, you can also decide how much you want to pay.

How much in dividends can I pay myself a year?

At the moment, there is no set limit on how much dividend you can pay yourself in a year, although it does depend on how much profit you are generating – as you can only pay dividends on profits.

With that said, the more dividend you pay yourself, the higher your dividend tax will be, especially as you pass through the various thresholds. These are:

  • 0% for £0 – £12,570 (Personal Allowance)
  • 8.75% for £12,571 – £50,270 (Basic Rate)
  • 33.75% for £50,270 – £150,000 (Higher Rate)
  • 39.35% for over £150,000 (Additional Rate)

You do not need to pay any tax on the initial £2,000 you pay yourself in dividends.

Are dividend payments tax-efficient?

Yes, very!

Dividend payments are highly tax-efficient since they are taxed at a lower rate compared to salary. They also do not incur National Insurance.

Once you have paid CT for the tax year 2024/25, you will pay 8.75% Income Tax on dividends which you received over £500, 33.75% Income Tax on those received over £50,270, and so on. If you refer to the table above, you’ll get a better understanding of how dividends are more tax-efficient vs. salary.

Plus, it’s worth noting that dividend income is added to your other taxable income and taxed at the very end, so you have to pay tax on dividend income as per your highest income tax band. The £500 dividend allowance means that you are only taxed on dividend amounts above this allowance cap.

How dividend payments work

Companies typically issue dividends to distribute earnings among their shareholders.

Being a Company Director, you can always choose to pay yourself either partially or fully through dividends. But in order to do that, you need to be a shareholder (being a Company Director does not automatically make you a shareholder), and your company must be generating enough profit to cover those dividend payments.

Many company owners or directors who report to an employer (from whom they receive their salaries via PAYE) opt to receive a dividend from their own company because that means they will no longer pay national insurance twice.

Since dividends are a distribution of profits among the company’s shareholders, dividend payments can only be taken once CT on the company’s profits has been deducted.

What to consider when paying yourself dividends

When considering whether taking your salary or income in the form of dividends is the right thing to do, consider the following:

Company profitability

If the variability of your profitability is high, then that could make your income highly unpredictable.

Dividend tax

You have to pay Corporation Tax (CT) on your profits before any dividends can be paid out.

Your income tax bracket

Your income tax bracket governs the amount of tax you will pay before paying the dividend to yourself. Please refer to the chart above.

Additional considerations

The rate of dividend tax to pay increased to 8.5% (from 7.5%) in April 2022.

If you mistakenly pay yourself a dividend before generating a profit, you must take out a Director’s Loan, which has to be paid back with interest.

Should I be paid a salary and dividends?

Yes, you should – it’s generally recommended that you pay yourself through a combination of both salary and dividends. Here’s why:

While company owners have the option of choosing to pay themselves through salary (PAYE) or dividends, they often choose a combination of both – taking a lower salary along with a higher dividend is a very tax-efficient combination, namely for these reasons:

  • You don’t have to pay any National Insurance on the dividends.
  • Depending on the total number of dividends you pay yourself, you can reduce your personal tax liability.
  • When you take a salary alone, it is automatically documented in a national insurance record for the sake of your state pension.
  • Your company may choose to claim the cost of your salary when calculating Corporation Tax, potentially saving the business money.
  • You can pay yourself as high a dividend as you like, as long as they do not exceed the company’s post-tax profit.

Therefore, a combination of drawing a relatively small salary and dividends is likely the most tax-beneficial decision you can make.

Furthermore, a major benefit of taking a combination of both comes from the fact that you get to control when funds leave the business and the timing of tax payment. Working with a tax accountant ensures that the appropriate business structure is in place to truly capitalise on this benefit so that you are always running your business in the smoothest, most tax-efficient way possible.

Looking to optimise your income? Get advice from VW Taxation

Ultimately, whether you decide to pay yourself via PAYE, dividends, or a combination of both, comes down to your own unique business circumstances.

Factors like when your company starts making a profit, the level of that profit, and whether you are being paid via PAYE through another employer – are all important considerations.

Our team of accountants can help you determine the best way of paying yourself according to your unique business circumstances 02392 324587.

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Picture of Gary Ellis | Director | VW Taxation
Gary Ellis | Director | VW Taxation

VW Taxation are self employment tax specialists based in Portsmouth. We specialise in tax accounting for contractors, limited companies and the self-employed.

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