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Paying Tax on Limited Company Dividends in 2022/23

Dividends are paid to shareholders out of a limited company’s profits and are subject to Income Tax. This article will consider the tax implications when drawing dividends through your limited company. 

How do limited company directors take money out?

When starting a business most people choose to become self-employed by registering as a sole trader or they form an ordinary partnership with others. However, many people who want to be their own boss and set up a private limited company.

Private limited companies make up about 37% of the total UK business population, while 56% are sole trader businesses and 7% are ordinary partnerships (source: BEIS).

There are pros and cons to each business formation option, with different payment methods and tax rules for each. Directors of small limited companies can take money out of the business in several ways, but a common way for sole company directors with no other employees is to:

  • pay just enough wages through the company payroll so that they qualify for state benefits and pension without paying National Insurance contributions
    • with no Income Tax payable on their wages either, because it doesn’t exceed the Personal Allowance (£12,570 per year in 2022/23)
    • with the rest of their income made up of company share dividend payments, which are subject to Income Tax.
  • The company must also pay Corporation Tax on its profits (19% in 2022/23)

This can provide a small tax advantage, which means you pay less tax and take home slightly more each month.

Need to know! The income threshold after which people start paying National Insurance will rise to £12,570 in July 2022, a £3,000 a year increase, following the Chancellor’s Spring Statement in March 2022.

What is a dividend?

A dividend is a payment that a company makes to its shareholders (ie those who own shares in the company). Share dividends are paid out of the company’s profits, whether from that financial year or from profits retained in the company from previous financial years.

A company’s share dividend payments must not exceed its profit from the company’s current financial year or profits retained in the company from previous financial years. If a company is not making a profit and no previous profits are retained in the company, dividend payments are not allowed and they should not be made.    

Find out more about the benefits of paying yourself dividends.

Who can receive a dividend payment?

Dividends must be paid to all shareholders (ie everyone with shares in the company), not just a select few or one (unless the company only has a few or one shareholder). Many “one-person-band” limited companies have just one shareholder, who is the company’s managing director, so dividends are only paid to them from available company profits.

How are small limited company dividends paid?

To pay a dividend, according to guidance from HMRC, you must “hold a directors’ meeting to ‘declare’ the dividend and keep minutes of the meeting, even if you’re the only director.”

For each dividend payment made, a dividend voucher must be produced, detailing the date, company name, names of the shareholders receiving a dividend and value of the dividend payment. The recipient should also receive a copy of the dividend voucher, while the company should retain a copy within its records.

Need to know! If you can’t prove that money paid to you from a company you run is a share dividend, HMRC can argue that it’s a salary payment and should be taxed accordingly, which can increase your tax bill.

How much tax will I pay on my dividends?

A limited company must pay Corporation Tax on its taxable profits (19% in 2022/23). It does not pay any tax on dividend payments it makes to shareholders.

The first £2,000 of annual dividend payments shareholders receive are tax-free (this is called the “dividend allowance”). If you receive annual dividend payments worth more than £2,000, the amount of tax you pay is determined by your taxable income and which Income Tax band you fall into.

You only pay Income Tax on taxable income that’s above the annual standard Personal Allowance, which is £12,570 a year (more if you claim Marriage Allowance or Blind Person’s Allowance; less if your income is more than £100,000 a year). Your Personal Allowance is the amount of income that you’re allowed to earn before Income Tax is payable. 

How much is dividend tax in 2022/23?

From 6 April 2022, for one year, tax on dividend income will increase by 1.25 percentage points, with the government saying the additional revenue will be used to “support the NHS, health and social care”, following the additional financial pressures brought by COVID-19. In 2023/24, a new health and social care levy will be introduced as a replacement.

  • 2022/23 dividend tax rates and thresholds

    • If you’re a basic rate Income Tax payer, dividend payments over £2,000 in 2022/23 will be subject to 8.75% Income Tax (if your annual income exceeds the Personal Allowance).
    • If you’re a higher rate Income Tax payer, dividend payments over £2,000 will be subject to 33.75% Income Tax (if your annual income exceeds the Personal Allowance).
    • If you’re an additional rate Income Tax payer, dividend payments over £2,000 will be subject to 39.35% Income Tax (if your annual income exceeds the Personal Allowance).

    The government says the increase in dividend tax rates will only last one tax year and Income Tax on dividends for 2023/24 will return to previous rates (as detailed below). However, from 6 April 2023, the levy will become a separate new tax.

  • 2021/22 dividend tax rates and thresholds

    • If you were a basic rate Income Tax payer, dividend payments over £2,000 in 2021/22 were subject to 7.5% Income Tax.
    • If you were a higher rate Income Tax payer, dividend payments over £2,000 in 2021/22 were subject to 32.5% Income Tax.
    • If you were an additional rate Income Tax payer, dividend payments over £2,000 in 2021/22 were subject to 38.1% Income Tax.

Reporting dividend income to HMRC

You don’t have to tell HMRC if your dividends do not exceed the dividend allowance for the tax year (ie if they’re less than £2,000).

If you receive up to £10,000 in dividends you can: contact the HMRC helpline; declare it in your Self Assessment tax return (SA100), if you already complete and file one each year or register for Self Assessmentif you’re not already registered.

If you receive more than £10,000 in dividends, you’ll need to complete and file a Self Assessment tax return. If you do not usually send a tax return, you must register by 5 October latest following the tax year in which you earned the income, although doing it sooner is recommended.

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