Are Limited Company Dividends Taxable?

Dividends are a common way for limited company owners to take income from their business. They are distributed from the company’s post-tax profits and can provide a tax-efficient income compared to a salary. But are limited company dividends taxable? The answer is yes, but the way dividends are taxed differs from other forms of income.

Here’s a breakdown of how dividend taxation works in the UK and what it means for limited company owners.

What Are Dividends?

Dividends are payments made to shareholders from the profits of a company. After a limited company pays Corporation Tax on its profits, the remaining amount can be distributed as dividends to shareholders. Many business owners use dividends alongside a small salary to reduce their overall tax liability.

Are Dividends Taxable?

Yes, dividends are subject to tax, but they are taxed differently from salary income. Here’s how dividend taxation works:

1. Tax-Free Dividend Allowance:
   • Every taxpayer in the UK is entitled to a tax-free dividend allowance. For the 2023/24 tax year, the allowance is £1,000.
   • Dividends within this allowance are not taxed.
2. Dividend Tax Rates:
   • Dividends above the tax-free allowance are taxed at different rates depending on your income tax band:
     • Basic Rate: 8.75% for income up to £37,700 (after your personal allowance).
     • Higher Rate: 33.75% for income between £37,701 and £150,000.
     • Additional Rate: 39.35% for income above £150,000.
3. No National Insurance Contributions (NICs):
   • Unlike salary income, dividends are not subject to NICs, making them a more tax-efficient option for many limited company owners.

How Are Dividends Declared and Paid?

Dividends must be properly declared and documented to remain compliant with UK regulations. Here’s the process:

1. Ensure Sufficient Profits:
   • Dividends can only be paid from post-tax profits. You cannot distribute dividends if your company is not making a profit.
2. Hold a Shareholder Meeting:
   • Directors must hold a meeting to declare the dividend, even if they are the sole shareholder.
3. Prepare a Dividend Voucher:
   • A dividend voucher must be issued for each payment. It should include details such as the amount paid, the date and the shareholders receiving the dividend.
4. Pay the Dividend:
   • Dividends are paid to shareholders according to their shareholding percentage.

Reporting Dividends to HMRC

Dividends must be reported to HMRC through the following channels:

1. Self-Assessment Tax Return:
   • Shareholders must declare their dividend income on their annual Self-Assessment tax return.
   • HMRC will calculate any tax owed on dividends exceeding the tax-free allowance.
2. Corporation Tax Return:
   • While dividends are paid from post-tax profits and do not reduce the company’s Corporation Tax liability, they should still be accurately recorded in the company’s financial records.

Tax Efficiency of Dividends

Dividends are a popular option for limited company owners because they are typically more tax-efficient than taking a salary. By combining a small salary within the personal allowance and dividends, owners can minimize their overall tax burden.

How We Can Help

Navigating the rules around dividends and taxation can be complex, but we’re here to help. Our services include:

• Advising on tax-efficient ways to draw income from your limited company.
• Ensuring your company’s records comply with HMRC requirements.
• Providing ongoing support to help your business grow.

Final Thoughts

Yes, limited company dividends are taxable, but they offer significant tax advantages when managed correctly. Understanding the tax rules and maintaining proper documentation are key to maximising your income and staying compliant. 

Related Reading

Are Limited Company Owners Self-Employed?

How To Set Up A Limited Company