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, dividends you draw from your company are also subject to tax.
Any dividend tax liabilities are calculated, and paid to HMRC, through the self assessment tax return system each year.
Company dividend tax rates
Limited company dividends are taxed in exactly the same way as dividends received by all other companies in the UK – including stockmarket listed firms.
There are currently three dividend tax rates in the UK:
- 10% – this is the ‘standard’ dividend tax rate which applies to income of up to £31,865 for the 2014/15 tax year.
- 32.5% – the ‘higher rate’ tax band if you are a ‘higher rate’ taxpayer. For the tax year to April 2015 this is if your income is between £31,866 and £150,000.
- 37.5% – which is the ‘additional’ dividend tax rate for people earning £150,000 or more.
All dividends automatically receive a 10% tax credit due to the fact that your company profits will already have been subject to corporation tax.
How much dividend tax should I pay?
If you are a standard rate taxpayer, the 10% tax credit wipes out any standard rate dividend tax liabilities you might have had, and you will owe nothing.
We now look how you calculate the amount of tax you will actually pay if you are a higher rate taxpayer, as it can be confusing.
In this example, you are the sole shareholder of a limited company with £40,000 to distribute from company profits. These are the steps you need to take to work out how much dividend tax you will need to pay on this amount;
- Funds to distribute is the ‘net dividend amount’ = £40,000.
- Multiply this by 100/90 to work out the ‘gross dividend amount’ = £44,444.44.
- You automatically receive a ‘tax credit’ for 10% of the gross dividend amount, which is £4,444.44 (£44,444.44 x 10%).
- As a higher rate taxpayer, you are liable for dividend tax at 32.5% on the gross dividend amount of £44,444.44. This equates £14,444.44 (£44,444.44 x 32.5).
- You then subtract the 10% tax credit of £4,444.44, to leave a total tax liability of £10,000 (£14,444.44 – £4,444.44).
So, in reality, if you are a higher rate taxpayer, you need to set aside 25% of your net dividend income for tax.
For any income which falls within the new ‘additional’ dividend tax band, your effective rate on those additional dividends is 30.55%.
Further information and help on tax matters
You can check out the current tax rate thresholds and the latest personal allowances in ByteStart’s guide to Tax rates for small business owners – 2014/15.
Details for the previous tax year can be found in Tax rates for small business owners – 2013/14
For more help and information on tax and related matters, try these guides;
- Using Research & Development tax relief to reduce your corporation tax bill
- What are limited company dividends?
- ByteStart’s Guide to the main business taxes?
- How setting up a salary sacrifice scheme can reward staff and lower your tax bill
Finally, you should always check with your accountant before acting on any of the information contained in this article.