What are dividends? When and how to take them

So, what are dividends in business? Dividends are taken from your businesses 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.

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

We spoke to Benjamin Dyer, CEO of Powered Now, the app that helps busy tradespeople keep on top of their finances, for his tips.

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 of dividends 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 dividends 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 between 2021/2022 and 2022/2023, you can earn up to £2,000 in dividends before you pay any tax. What’s more, taking dividends 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, all income is taxed, so they are subject to tax.

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

• 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.

Calculating the tax 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 dividend 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, dividends need to be declared on your Self-Assessment tax return.

Should I take dividends or a salary?

Taking dividends can help maximise your income and reward shareholders.

Benjamin Dyer, CEO of Powered Now said:

“The reason why dividends can get money more effectively in your pocket is to save on National Insurance.”

However,

“The reason to continue paying a reasonable salary is so that you earn pension credits, you can do this even when you are below the threshold before National Insurance kicks in.”

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

Checkatrade members get the invoicing app for free

All Checkatrade members get free access to Powered Now’s invoicing app, 1 Trade App*.

The 1 Trade App allows you to manage your business on the go, create nice looking invoices and quotes, and lets customers pay you quickly.

Or, you can get 30% off if you upgrade to the full Powered Now app in your first year with Powered Now**.

The upgrade to Powered Now adds team scheduling and tracking, the ability to accept card payments, and to submit VAT returns directly to HMRC.

There are many other benefits to becoming a Checktrade member, including savings on insurance, vans and discounts at wholesalers.

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 on a dividend?

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 of dividends to allocate.
• You’ll need to pay tax on your dividends, although the first £2,000 you take will be tax-free.
• Dividends are often paid out on a monthly or quarterly basis.

*Offer is valid until midnight December 31st 2022. Offer is valid for non-current subscribers to Powered Now.

**The offer is valid for new subscribers to Powered Now only. The offer will be applied to the first consecutive subscription up to 12 months. All new subscribers will receive an initial 2 weeks free of charge trial period. The offer cannot be used in conjunction with any other offer.