The vast majority of our clients operate as Limited Companies, and there are many advantages in doing so. One of the main ones is that, as a Director & shareholder, you can receive dividends in addition to your director’s salary. This gives you far greater control and flexibility over your income in terms of when and how you pay yourself. It also enables you to significantly improve your tax efficiency and therefore your take home pay.
A dividend is a portion of company profit that a limited company pays to a shareholder (or shareholders) in exchange for their investment in the business. The dividend amount is impacted by various factors including the amount of surplus income the company has available and the percentage of shareholdings that the shareholder (or shareholders) has.
Is It Beneficial For You To Be Paid Dividends?
Dividend payments between £12,570 and £50,270 will be taxed at just 8.75%. Contrast this with a salary which has 20% income tax and a 13.25% National Insurance contribution levied against it. That’s 33.25% on all salaried earnings above the annual national insurance and tax allowances. In addition to this, the company pays employers National Insurance at a rate of 15.05%.
However, it is worth noting that dividend distributions are paid from the company profits after corporation tax is applied, currently at a rate of 19%.
Receiving dividends can therefore be very beneficial as the tax on dividends is significantly lower than the equivalent rate of income tax. There’s also a £2,000 tax-free dividend allowance for the year.
Being paid this way through a limited company is more tax-efficient than if you were operating as a non-limited company. Looking back a few years, the potential savings on tax have reduced over time. But if you organise your remuneration carefully, significant tax savings can be made.
Unlike with salaries and wages, income from dividends is not taxed at source via Pay As You Earn (PAYE). Recipients are responsible for declaring their dividend income to HMRC by completing a self-assessment tax return at the end of each tax year.
Dividends are generally distributed quarterly but as a contractor operating as a limited company, you have more flexibility. You could pay yourself dividends annually, twice per year, monthly or whenever the company has surplus funds available.
Dividends aren’t always allowed or advised in every circumstance however, so please contact us if you have any queries. We can advise you on the most tax-efficient and cost-effective way to structure your remuneration.
2022/23 Tax Year Dividend Tax Rate Bands
Below we outline the dividend tax rate bands for the current 2022/23 tax year and the amount of tax you’ll pay as a shareholder and director of a limited company.
The amount of tax that you pay on dividends changes at the start of each tax year. Dividend tax rates are based upon income tax bands and thresholds. This means that the dividend tax amount you’ll pay will depend upon your overall taxable income from all sources.
Dividend tax isn’t payable on income that’s within your personal allowance which is £12,570 for the 2022/23 tax year. The first £2,000 of any dividend income within the year is also tax-free (dividend allowance), so you can earn up to £14,570 without paying any tax.
The below rates of dividend tax will apply for the 2022/23 tax year (6th April 22 – 5th April 23):
- £0 – £12,570 (Personal Allowance) 0.00%
- £12,571 to £50,270 (Basic Rate) 8.75%
- £50,271 to £150,000 (Higher Rate) 33.75%
- Over £150,000 (Additional Rate) 39.35%
You can determine your tax band by adding together your annual dividend income with any other income that you receive.
Does Your Personal Allowance Cover Your Dividend Income?
If you receive dividends of up to £14,570 in the 2022/23 tax year without receiving income from any other sources, you will not have to pay any personal tax. Your personal allowance covers the first £12,570 and the tax-free dividend allowance covers the remaining £2,000.
Do You Pay Dividend Tax On Shares Held In Pensions Or An ISA?
No tax has to be paid on dividends from shares held in an ISA, and your dividend allowance is unaffected. Up to £20,000 of dividend income can be saved in stocks & shares ISAs in the 22/23 tax year with no tax liability. Furthermore, capital gains tax isn’t payable against any profits from investments in your stocks & shares ISAs.
If you receive dividend income into a pension fund, this will be tax-free as long as it remains in the pension. You will be taxed against the current pension withdrawal rules if and when the funds are withdrawn.
Should You Go Limited To Take Advantage Of Dividend Tax Efficiency?
If you’re currently operating as a sole trader, it generally is more tax-efficient to incorporate in relation to income tax and dividend tax.
But there are various factors to consider before making the decision to form a limited company beyond simple tax advantages. Depending on the type of business you operate and the level of income it generates, incorporating might not be cost-effective for you.
Here at Gorilla Accounting, we’ve incorporated thousands of limited companies for our clients and our expert accountants can answer any queries you have before deciding if going limited is right for you.
Salary & Dividend Tax Calculator
We’ve combined a salary tax calculator and dividend tax calculator so you can easily calculate how much income tax and tax on dividends you will pay based on your current salary, and the annual dividend payments you receive to work out your take home pay. Simply enter your gross salary and the amount of dividends you’ll receive this financial year.
