dividend and piggy bank

What is a dividend?

Kirsty Young Limited Company, Personal Tax, Tax

You might feel like this is a silly question, but most of us don’t get taught this kind of thing at school.

As business accountants, we spend all day helping business owners on their journey, and as a result this question often pops up.

 

So what exactly is a dividend?

In simple terms, a dividend is generally a sum of money that a limited company pays out to someone who owns shares in the company. This is essentially payment of some of the company’s profit in a lump sum.

In the small business world, often the owners of the company will pay themselves using dividends, alongside a small ‘proper’ salary.

The reason for this is that taking into account all taxes, paying yourself a dividend rather than a ‘normal’ salary generally means you keep more of your money. Paying yourself using dividends is ‘tax efficient’, i.e you pay less taxes overall on the money when structured this way.

 

So how to I pay dividends?

For a step-by-step guide, see our dividend payments blog.

To ‘declare’ a dividend you need to:

  • Review your accounts to make sure you have enough profits to pay the dividend.
  • Decide on the type of dividend (this will usually be ‘Interim’).
  • Record the decision and prepare some paperwork (meeting minutes and a ‘voucher’).

 

Do I pay tax on dividends?

At the time of writing, there is a £2,000 a year dividend allowance, which means your first £2,000 of dividends are tax free.

Above the allowance, you pay tax at:

  • 7.5% (Basic Rate)
  • 32.5% (Higher Rate)
  • 38.1% (Additional Rate)

The amount you pay depends on your overall income level. This tax is generally paid inside of your annual personal tax return.

 

How can I maximise the tax savings offered by dividends?

Good question! Check our blogs on:

 

I’m still confused about dividends

Ask your accountant or book a consultation with us to help you make the most of your annual tax-free dividend allowance. We offer a paid 1-hour, 1-2-1 consultation so you can ask simple questions of an accountant. You don’t have to become a client, so it’s a great way for you to get the help you need, when you need it.