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What are dividends, and how to take them

While paying yourself a salary is a no-brainer, you may have heard about dividends, another way of boosting your income. But what are dividends, and how much should you take? We explain all.

What are dividends?

So, what are dividends in business? Simply put, they are payments taken from your business’s profits and paid to your company shareholders.

They can be paid in cash or extra shares, and it’s up to the company directors to decide when and how much to pay out.

Owning a limited company means you can choose to allocate dividends to yourself as well as any other shareholders. This is a great way of increasing your income once you’ve worked out how to pay yourself when self-employed.

How do dividends work?

A dividend is a payment that comes from your company’s earnings. They are paid to shareholders, as long as the business has made a profit.

How to take dividends

To pay a dividend you’ll need to hold a meeting to declare their payment. You’ll need to keep formal minutes of this meeting – even if you’re the only director.

You’ll also need paperwork, called a ‘dividend voucher’ for each payment that’s made. For more information on how they work and how to take them, check the full guide to taking money out of your limited company from Gov.uk.

Please note, you’ll need to pay tax on any dividends you take (more on this later).

finance for home improvements

When to pay dividends

There’s no set timeline on when to pay dividends. Many businesses choose to pay them quarterly or every six months, but there’s no rules around this.

You can distribute them as frequently as you want throughout the year, as long as your company has enough profit to do so.

But it’s important to know that your company must not pay out more in dividends than its available profits from the current and previous financial years.

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Can you take them monthly?

You might be wondering if you can take dividends monthly, and this is absolutely possible. You’ll need to declare this in a directors’ meeting and issue vouchers each month.

Some people worry that monthly payments can look like a disguised salary. But as long as you have the meeting minutes and enough profit in the business to cover them, your records will be clear.

Whether you choose to take them monthly or not, it’s best to keep your dividend payments in a regular schedule, such as at the end of a month or at the end of a quarter.

Otherwise, random or irregular payments might make your business look financially questionable.

How are dividends paid on shares?

Dividends are paid out to company shareholders in cash or extra shares. This is a good way of building confidence in your company while also rewarding your shareholders.

The amount each shareholder will receive depends on the number of shares they hold. As a company director, you may own 100% of the shares in your company.

This means you can choose when to pay them to yourself based on your company’s profits. Remember, you can also use your profits to reinvest in your business, for example, through training for employees or upgrading your tools.

How much in dividends can I pay myself tax-free?

This figure will change over time, but under current income tax rules, you can earn up to £2,000 before you pay any tax.

What’s more, taking them with a salary can be very efficient when it comes to paying taxes.

Why do I need to pay tax on my dividends?

Dividends are a form of income – and as all income is taxed, they are also subject to tax.

There are a few ways to minimise the tax you pay:

  • Use your tax-free dividend allowance of £2,000 (2021/22). You then pay tax on dividends over this threshold. This rate of tax is based on the rate you pay on your other income
  • Use your personal tax-free allowance (£12,570 in 2021/22). If your sole source of income is through investments, you can use your personal tax-free allowance before you start paying tax on dividends
  • Hold your shares or funds in a stocks and shares ISA. Do this, and you’ll avoid paying tax on these dividends

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How much tax do you pay on dividends?

To calculate the tax you’ll pay, add your total dividend income to your other income. It’s important to note you may pay tax at more than one rate.

Here’s a really simple example from gov.uk:

First, add your dividend earnings to your other income

  • £3,000 in dividends
  • £29,570 in salary
  • Total income for 2022/23: £3,000 + £29,570 = £32,570

Next, deduct your personal tax allowance (£12,570 for earnings under £100k in 2022/23)

  • £32,570 – £12,570 = £20,000 taxable income

Your taxable income sits within the basic rate tax band of 20%, so you would pay:

  • 20% tax on £17,000 of wages
  • No tax on £2,000 of your dividend income, due to the tax-free allowance
  • 8.75% tax on the remaining £1,000 of dividend income

Do UK dividends count as income?

Similar to paying yourself a salary, UK dividends do count as income. This means you’ll need to pay tax if you go over the current tax-free allowance of £2,000.

In addition, as they’re a form of income, dividends need to be declared on your Self-Assessment tax return.

how much dividend can i pay myself_

Should I take dividends or a salary?

Taking dividends can help maximise your income and reward shareholders.

There are many financial rules that apply here. So, if you’re struggling to balance dividends and your salary, we’d recommend finding an accountant. They can guide you through the process and offer you the latest advice.

If you’re looking for some insight on how much you should pay in salaries, check our guide to pricing employee salaries for a benchmark.

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Dividend FAQs

Are dividends paid monthly?

As a company director, you can choose how frequently you pay dividends. However, it’s important to note that taking dividends on random dates can make the company seem in poor financial health.

That’s why dividends are usually paid monthly or quarterly.

How much tax will I pay?

Dividends are a type of income, so you’ll need to pay tax on any payments you make.

So, what rate are dividends taxed at? Well, the first £2,000 in dividends you take will be tax-free but after that the rate increases to 8.75% from April 2022. The more dividends you take, the higher this rate will go.

Key details about dividends

  • Dividends are payments made to shareholders, taken from company profits.
  • As a company director, you can decide the frequency and amount to allocate.
  • You’ll need to pay tax on them, although the first £2,000 you take will be tax-free.
  • Dividends are often paid out on a monthly or quarterly basis.

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