For some self-employed people who work through a limited company, paying themselves through dividends can be a more tax efficient option.
For self-employed people operating their business as a limited company, often the most tax efficient way of paying yourself, as a limited company director, is through a combination of salary and dividends.
This would be as an alternative to paying yourself solely through Pay As You Earn (PAYE).
Each year, you can earn some dividend income without paying tax.
Like you receive a personal allowance on your income (the amount of income you can earn each year without paying tax), you also receive a personal allowance on dividends.
This means you can receive £1,000 in dividends, in the tax year 2023 – 2024, tax free.
If you are considering paying yourself through dividends, firstly speak with your accountant.
It’s extremely important for all self-employed people to work with an accountant, to ensure taxation and accounting is completely correct.
On the GOV.UK, HMRC specify that a directors meeting must be held to announce the dividend and meeting minutes must be recorded, even if you are the only director.
For each dividend paid, a dividend voucher needs to created. HMRC guidelines (1) say this must include:
A copy of the voucher should be given to all of those receiving the dividend. A copy should also be retained for company records.
Dividend tax is an income tax that you pay yourself personally, not through your company.
Everyone receives a dividend allowance each year. This means that some of the dividends you receive each year are tax free.
For the tax year 2023 – 2024, the dividend allowance is £1,000.
The amount of tax you pay on dividends over this allowance depends on your Income Tax band.
|Tax band||Tax rate on dividends over the allowance|
|Additional rate||39.1% (to be removed after 6 April 2023)|
When calculating your tax band, you need to add up your wage and total dividend pay for the year.
Depending on your overall income (dividends and wage), you could pay tax at more than one rate.
To put this into context, here is an example from HMRC:
“You get £3,000 in dividends and earn £29,500 in wages in the 2020 to 2021 tax year.
This gives you a total income of £32,500.
You have a Personal Allowance of £12,500. Take this off your total income to leave a taxable income of £20,000.
This is in the basic rate tax band, so you would pay:
If you are earning up to £10,000 in dividends, you need to inform HMRC. You can do this by ringing their helpline on 0300 200 3300, asking them to change your tax code or by putting it in your Self-Assessment tax return.
If you are earning over £10,000 in dividends, you will need to fill in a Self-Assessment tax return.
When you are working out your Corporation Tax, remember that dividends do not count as business costs.
For self-employed freelancers and contractors, dividends can be great tax-efficient way of earning money. If you’re unsure of how much to distribute in dividends, it’s best to consult your accountant.
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