Director Dividends Tax – How much do you pay and how does it work?

Tony Dhanjal

Dividends Tax

This Article Contains

As a shareholder of a Limited Company, you may have come across the term  and the associated term ‘dividends tax’. In this article, I explain the very concept (in plain English) of a dividend and dividends tax a UK tax resident shareholder is obliged to pay on any UK dividends received.

The Basics Of A Dividend

A dividend is essentially a form of remuneration (income) for shareholders of a company. Your company could be a Ltd Co (Limited Company) or a PLC (Public Limited Company). Dividends can only be paid from profits after tax, so in other words your company has to make a profit, pay its corporation tax on that profit (currently 19% as at 2020-21) and what is left over is called profits after tax.   The directors of the company will decide whether a dividend is payable from these profits after tax, and if they are a certain paperwork needs to be completed to formalise the transaction. Dividends must only ever be paid out of profits after tax and/or distributable reserves. I will revisit this statement further below in a simple worked example with numbers.

Dividend Documentation

Once a dividend has been declared and paid to the shareholder, a certain amount of paperwork is required to formalise the dividend payment. Firstly, a dividend voucher needs to be raised. This voucher contains details such as the date of payment, company name, shareholder name and amount of dividend.

Ideally the minutes of the board meeting where the dividends where declared should be saved in the company files by the company secretary.

Tax Free Dividends

In the UK, each UK tax resident is entitled to what is known as a personal allowance. In the 2020-21 tax year, this is currently £12,500 per annum.

So in other words, you can earn this amount of income from any source and pay zero tax. In addition to this, there is a dividend allowance amount of £2,000 per annum.

So, effectively, you can be paid up to £14,500 in the 2020-21 tax year through a combination of salary and dividends without paying any tax. 

Ready to know your numbers?

Get access to exclusive courses, resources & videos on our FREE membership site.

 

Dividend Taxes – A Simple Worked Example

You are the director and sole shareholder of ABC Ltd. Your company Income Statement for the company year to 31st March 2020 is as follows:

Revenue                                        £200,000  (A)

Costs and Expenses                   £120,000  (B)

PBT (profit before tax)               £80,000   (C) = (A)-(B)

Corporation Tax at (19%)           £15,200    (D) = (C) x 19%

PAT (profit after tax)                £64,800  (E) = (C)-(D)

The vital number here is E, profits after tax. This is the amount that is available to pay all shareholders as a dividend. The board/directors do not have to pay out the whole amount, it is at their discretion as to how much (or all) of this amount should be paid out in dividends. In addition to this, there may be historical tax implicated reserves (in plain English, profits after tax from previous years that were never paid out as dividends, in part or full) that also are available to pay as dividends to shareholders

Remember – Dividends must only be paid out from profits after tax + historical distributable reserves.

Dividend Taxes – How Much Is To Be Paid?

In the example above, let’s assume the whole amount is paid out to the 100% shareholder of ABC Ltd, you. You receive £64,800 into your personal bank account from the company bank account, a transaction that is labelled ‘dividends 2020’. It is this amount that rolls up into your total aggregate personal income for the relevant tax year and becomes part of your total tax computation. The dividends received are subject to dividends tax.

If we do the calculations:

First     £12,500              –     £0

Next     £2,000               –     £0

Next     £35,500             –     £2,662.50 (at 7.5%)

Final     £14,800            –     £4,810 (at 32.5%)

TOTAL £64,800          –    £7,472.50

How To Earn £50,000 And Pay Less Than 7.5% Personal Tax (In 2020-21)

Now this is biggie. You can pay yourself up to £50,000 in the 2020-21 tax year and end up paying less than 7.5% of personal tax on the whole amount. In order to achieve this, there are many factors to consider, to include national insurance and other sources of income. However, if you’re affairs are relatively straightforward, then I strongly recommend watching my video below that explains the how.

Dividend Tax Rates – Will They Increase In The Future?

This paragraph is my own express opinion, and does not constitute actual fact or what will definately happen. However, dividend taxes were last raised back in 2015. Since then, certain policymakers have been intent on trying to close the gap between dividend taxes and employment (income tax). To say this is bonkers is an understatement, as entrepreneurs take levels of risks that employees will not, or never take. And therefore, in my own opinion, entrepreneurs should be rewarded with lower taxes and more tax breaks, to keep the entrepreneurial light shining and creating jobs in our economy. 

Whether the government or policy makers agree with this only time can tell. With the whole coronavirus pandemic, there will be future tax rises to pay for all this government stimulus. Dividend taxes are likely to be evaluated at the least, so don’t be surprised if the dividend tax rates do increase in 2021 or beyond or as a minimum, the dividend allowance is reduced if not taken away

Ready to know your numbers?

Get access to exclusive courses, resources & videos on our FREE membership site.

Practice based accountant with over 10 years experience, specialising in SME's, Freelancers and Personal Tax. "I take pride in proactively recognising tax planning opportunities on behalf of clients to help them operate more efficiently."

Here’s what our clients say

Browse by category:

Categories

You might also like…

eGuides

Loan Agreement Download

Ready to know your numbers? Get access to exclusive courses, resources & videos on our FREE membership site. Learn more The Director Loan Agreement (unsecured) …

Read More
The Super Deduction
eGuides

The Super Deduction

The Super Deduction If you are interested in lowering your corporation tax bill by up to 25%, then the new Super Deduction (introduced in the …

Read More
offshore company
Blog

3 Big Reasons To Start An Offshore Company Now

When most people think of an offshore company they think of shady dealings and suitcases of cash being deposited in the Cayman Islands. This is …

Read More
photo png

I hope this blog post empowers you...

...do you want higher quality accounting and tax content? Stuff that can really help you save £000's in tax, legally? Head over to our Academy where you can get access to all this ...

Grow & Give Back

We believe in growth and giving back to our community. A percentage of every penny we make goes straight to our charitable partner Nishkam SWAT, serving the homeless in London

Aidhan & Partners is a trading style of a joint venture between Aidhan (Financial Services Ltd), a limited company registered in England under company number 04953002 and Simply Accountants Ltd, a limited company registered in England under company number 08535253.  Our registered office is: Aidhan, 199 Bishopsgate, London EC2M 3TY
Disclaimer – all our content is for general guidance only and does not constitute formal advice. We always recommend you take professional advice.

© Aidhan Financial

2021