If you are a limited company shareholder, you may have to pay personal tax on any dividend income you receive. This article outlines how company dividends are taxed.
Although your company profits will already have been subject to corporation tax, shareholders also have to pay dividend tax on a personal basis. You pay any dividend tax liabilities via the self assessment system each year.
Company dividend tax rates
Limited company dividends are taxed in exactly the same was as dividends received by all other companies in the UK – including stockmarket quoted ones.
There are three dividend tax rates:
- 10% – standard dividend tax rate
- 32.5% – higher rate tax rate (if you’re a ‘higher rate’ taxpayer).
- 42.5% – additional dividend tax rate (for people earning £150k or more).
These are the headline dividend tax rates. All dividends automatically receive a 10% tax credit due to the fact that your company profits will already have been subject to corporation tax.
If you’re a lower rate taxpayer, the 10% tax credit wipes out any standard rate dividend tax liabilities you might have had, and you will owe nothing.
How much dividend tax should I pay?
We now look at your to work out how much tax you will actually pay if you’re a higher rate taxpayer, as it can be confusing.
In this example, you’re the sole shareholder of a limited company with £40,000 to distribute from company profits.
1) Funds to distribute is the ‘net dividend amount’ = £40,000
2) Multiply by 100/90 to work out the ‘gross dividend amount’ = £44,444.44
3) You automatically receive a ‘tax credit’ for 10% of the gross dividend amount, which is £4,444,44
4) As a higher rate taxpayer, take 32.5% of the gross dividend amount, which is £14,444
5) Subtract the 10% tax credit (£4,444,44), leaving a total tax liability of £10,000
So, in reality, if you’re a higher rate taxpayer, you need to set aside around 25% of your dividend income for tax.
For any income which falls within the new ‘additional’ dividend tax band, your effective rate on those additional dividends is 36.1%.
You can check out the latest tax rate thresholds and the latest personal allowance threshold in our tax rates section.
For more background information, try our article – what are limited company dividends?
Finally, you should always check with your accountant before acting on any of the information contained in this article.
Download this page in PDF format