What is a dividend?
A dividend is a payment a limited company can make to shareholders when it has made and retained a sufficient profit.
For this year 2016/17, the government has chanced how dividend is taxed, you will no longer receive a nominal tax credit, but you will be able to take out £5,000 tax free.
How would I pay myself a dividend?
Your first step is to assess the available profit of the limited company, also known as ‘retained profits’, which can be calculated by deducting expenses such as utilise, rent, PAYE, professional fees, etc, and any tax liabilities – including the corporation tax due on the profit which is currently 20% for profit below £300,000. This is the amount which is available for payment as dividends. Be aware; this is the cumulative balance ever since the company was formed, so needs to take into account liabilities on any loans, for example, and previous dividends. The first time you approach this important calculation, it is sensible to enlist a qualified accountant.
You will then need to document the dividend, by creating a dividend voucher. This is a legal document that all companies that issue dividends create and issue to shareholders.
The dividend voucher should detail the date, company name, names of the shareholders being paid a dividend; the amount of the dividend, (and before 6 April 2016 the amount of the notional dividend tax credit). Once a dividend voucher has been created, you can then actually pay a dividend.
You should be aware that your dividend could be illegal if you distribute an amount higher than is available or if you fail to create a dividend voucher and complete the necessary paperwork.
It is also worth bearing in mind that as dividends are the distribution of profits after tax, if you don’t document and follow this process correctly, HMRC may take the figures you have drawn and not documented correctly and claim that they are either a salary or that they are forming a Directors’ Loan, both of which would have negative tax consequences.
How are dividends taxed?
From 6 April 2016 dividends will be taxed as follows:
You won’t pay tax on the first £5,000 of dividends that you get in the tax year (6 April to 5 April).
Above the £5,000 tax free dividends, will then depend on which Income Tax band you fall within.
| Tax band | Tax rate on dividends over £5,000 |
| Basic rate (and non-taxpayers) | 7.5% |
| Higher rate | 32.5% |
| Additional rate | 38.1% |
The notional tax credit no longer exists after 5 April 2016.