Introduction

Understanding dividend taxation is crucial for directors and shareholders of limited companies. Here’s a simplified guide to help you navigate through dividend distribution and taxation.

 

Dividend Basics

Q: What exactly are dividends?

A: Dividends are payments made by a company to its shareholders from the profits it has made after paying Corporation Tax. They’re a way for shareholders to receive a return on their investment.

 

Q: Can dividends be paid at any time?

A: Yes, dividends can be distributed regularly or as one-off payments, provided the company has sufficient profits after taxes to cover them.

 

Q: How are dividends different from salaries?

A: Unlike salaries, which are business expenses that reduce the company’s taxable profit, dividends are distributed from post-tax profits and do not affect the corporation tax liability.

 

Taxation of Dividends

Q: How are dividends taxed?

A: The first £500 of your dividends is covered by the personal dividend allowance and is tax-free. Beyond this allowance, dividends are taxed at different rates depending on your total taxable income.

 

Q: What are the dividend tax rates for the 2024/25 tax year?

A: After your personal income allowance of £12,570 plus the £500 dividend allowance:

• Basic Rate (income up to £50,270): 8.75%
• Higher Rate (income between £50,271 and £150,000): 33.75%
• Additional Rate (income over £150,000): 39.35%

 

Q: Does receiving a salary affect how my dividends are taxed?

A: Yes. If you also take a salary, it uses your personal tax allowance first. Any dividends then received are taxed after your personal and dividend allowances are exhausted.

 

Reporting and Documentation

Q: How do I report dividend income to HMRC?

A: Dividend income is reported through your Self Assessment tax return and filed annually with HMRC.

 

Q: What records should I keep for dividend distributions?

A: You should keep a dividend voucher for each distribution, which includes the date, company name, shareholder names, and the dividend amount.

 

Dividend Vouchers

Q: What is a dividend voucher?

A: It’s a document that records the details of a dividend payment, acting as proof that the dividend was declared and distributed.

 

Changes in Dividend Taxation

Q: Can the personal dividend allowance or tax rates change?

A: Yes, both the allowance and the tax rates can vary from year to year, so it’s important to stay updated on the latest tax regulations.

 

Simplifying Dividend Management

Q: How can I manage dividends and their taxation more easily?

A: Consulting with a professional accountant or financial advisor can help. They can assist with dividend strategy, ensure compliance with tax laws, and keep accurate records.

 

Conclusion

This guide aims to clarify the main aspects of dividend distribution and taxation for limited company owners and shareholders. For specific advice and guidance, consider enlisting the services of a professional.

For any further queries, please don’t hesitate to reach out via our Client Services email. We’re here to help!

 

About Neame & Co 

At Neame & Co we specialise in stress free company filing: the easy way to file your year end Company Accounts and Corporate Tax Return to Companies House and HMRC. Maximise tax efficiency, real human support throughout and 100% online and paperless service. Visit Neame & Co for more details on how we can help!