Limited company dividends are the amount of money/profit that a limited company pays to its shareholders. The amount of money earned by a limited company is distributed in the form of dividends after paying all the liabilities and expenses, along with the outstanding taxes (like VAT and Corporation Tax).
Your company is not liable to pay tax on the dividends that it issues, rather you (shareholder) need to pay it via annual Self Assessment. So you need to know what are limited company dividends and how they are taxed?
Read on to find out!
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What are Limited Company Dividends?
As a shareholder, the amount you receive on the share you buy from a limited company is known as a dividend. You need to understand that the dividend income is taxed separately from the normal income you receive as salary or pensions, etc.
Getting dividends is a tax-efficient way to save your money as NICs are not payable, however with the normal salary you need to pay NICs. For this reason, many limited company owners get a low income in the form of salary and get a bulk as dividends.
How Dividends are Taxed?
Fortunately, the first £2,000 (2021-22) is the tax-free dividend allowance on which there is no tax payable. If you earn over this amount, you need to pay tax as per your tax band. By holding shares or funds in a stock and shares Isas, you can avoid tax on the income earned from your investment.
In addition to dividend allowance, you can also earn £12,570 of personal allowance tax-free ( 2021-22). Here are the tax rates you need to pay on dividends:
- Basic Rate taxpayers pay 7.5%
- Higher Rate taxpayers pay 32.5%
- Additional Rate taxpayers pay 38.1%
When do you Need to Notify HMRC on Dividend Tax?
If you earn above £10,000 as dividends in the year, you need to mention this income on your Self Assessment tax return. You are required to register with HMRC if you haven’t completed a tax return before.
If your income is over £2,000 but below £10,000, you don’t need to file a Self Assessment tax return, instead you need to contact HMRC. They will make adjustments with your tax code to deduct dividend tax from your salary.
Also, you are not required to inform HMRC, if you earn below £2,000 as a dividend income (dividend allowance 2021-22)
Quick Sum Up
To sum up the discussion, you have now got enough information on what is limited company dividends and how they are taxed. The dividend is the amount you earn against a company share and it is taxable over the dividend allowance threshold and as per your dividend income. Please consider this short post as the basic overview of the topic, we haven’t discussed the complex issues related to dividends.
If you want to learn more about dividends, or the complex tax issues associated with them, feel free to contact us!
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Disclaimer: This blog is written for general information on how dividends are taxed.