How are Limited Company Dividends Taxed?

company dividend tax calculation

If you are a limited company shareholder, you may have to pay tax on any dividend income you receive.

Here’s how company dividends are taxed and how you calculate the amount of tax due on dividend income.

Money you receive from company dividends is taxed separately to income you get in the form of salary or pension.

All UK company dividends – whether they are from stock market listed firms or your own limited company – are taxed in the same way.

One important point to note is that no tax is due on any dividends received from shares that are held in an ISA.

If you are a business owner receiving dividends from your own limited company and shares in stock market listed companies, it may be beneficial to transfer your listed shareholdings into an ISA.

Dividend allowance

Every individual receives a ‘dividend allowance’ each year. This allows you to receive a certain amount of dividend income without any tax to pay.

For the current tax year, (and 2018/19) the dividend allowance is £2,000. This means that you don’t need to pay tax on the first £2,000 of dividend payments you receive.

Dividend tax rates

The amount of tax you pay on dividends over your £2,000 dividend allowance, is determined by your Income Tax Bands.

The tax rates payable on dividends are as follows;

  • Basic Rate taxpayers (up to £50,000 for 2019/20) pay 7.5% tax on dividends
  • Higher Rate taxpayers (up to £150,000 for 2019/20) pay 32.5% tax on dividends
  • Additional Rate taxpayers (over £150,000 for 2019/20) pay 38.1% tax on dividends

How much dividend tax should I pay?

To show how this works in practice, let’s look at two examples;

Example 1 – Dividend tax for a Basic Rate taxpayer

James receives £8,000 in dividend payments in the 2019/20 tax year.

He receives other taxable income of £30,000.

To establish James’ Income Tax Rate band, he needs to add together all his income. His dividend income is £8,000 and his other taxable income is £30,000 so his total income is £38,000.

James’ total income is less than £50,000, so he is a Basic Rate taxpayer. The tax rate at which James will pay tax on his dividends is therefore 7.5%.

The Dividend Allowance for 2019/20 is £2,000. So, before calculating the tax to pay on his dividends, James can subtract this from the £8,000 he received in company dividends. He therefore, needs to pay dividend tax on £6,000 (£8,000 – £2,000) of dividend income.

James now knows his dividend tax rate is 7.5%, and that he needs to pay this on £6,000 of dividends.

The amount of dividend tax James needs to pay is £450 (£6,000 @ 7.5%).

Example 2 – Dividend tax for a Higher Rate taxpayer

Let’s look at an example for a Higher Rate taxpayer;

Emma is a business owner. Her business is a limited company and she pays herself an annual salary of £15,000. She received dividend payments of £40,000 in the 2019/20 tax year.

To establish Emma’s Income Tax Rate band, she needs to add her dividend income (£40,000) to her other taxable income (£15,000). This totals £55,000, which is between £50,000 and £150,000 meaning that Emma is a Higher Rate taxpayer.

Emma will therefore pay tax on her dividends at two different rates. She will pay 7.5% on dividends up to the £50,000 Basic Rate taxpayer threshold, and will need to pay 32.5% on the £5,000 of dividend income that is over the £50,000 threshold.

The Dividend Allowance for 2019/20 is £2,000. So, before calculating the tax to pay on her dividends, can subtract this from the £40,000 she received in company dividends. She therefore, needs to pay dividend tax on £38,000 (£40,000 – £2,000) of dividend income.

Emma needs to pay 32.5% tax on the £5,000 of dividends over the £50,000 threshold, and 7.5% on the remaining £33,000 (£38,000 – £5,000).

Emma’s dividend tax can be calculated as;

£5,000 @ 32.5% = £1,625

£33,000 @ 7.5% = £2,475

Giving a total of £4,100 of tax to pay on her dividend income.

Notifying HMRC and paying tax on dividends

If you receive over £10,000 in dividends in the tax year, you will need to include your dividend income on your Self Assessment tax return. If you haven’t previously completed a tax return, you will need to register with HMRC.

If your dividend income is more than the £2,000 dividend allowance but less than £10,000, and you don’t normally file a Self Assessment tax return, you should contact HMRC. They may adjust your tax code, so that the dividend tax you owe is taken from your salary.

You don’t need to notify HMRC if your dividend income is below the £2,000 dividend allowance for 2019/20.

Further information and help on tax matters

Tax guides

Accounts

Business structures

Finally, tax is a complex subject so you should always check with your accountant before acting on any of the information contained in this article.

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