As a director or business owner, you may be able to pay less tax on your company earnings through dividends.
What are dividends?
Dividends are portions of a business’s earnings that can be disbursed to its owners and directors, depending upon the number of shares they hold.
One critical point to remember is that for dividends to be distributed, the business must be in a profitable position and the board must authorise such a decision.
Annually, you can accumulate dividends up to a specific limit before being liable for tax. From 6 April 2023, the dividend allowance stands at £1,000. This allowance is supplemental to the personal tax-free allowance of £12,570.
The tax rate applicable on dividends surpassing this allowance is less than the Income Tax rate.
Here are the dividend tax rates for each band contrasted with the corresponding Income Tax rates:
If feasible, receiving income in the form of dividends can result in lesser tax payments, but it is crucial to assess the potential impacts of such a strategy on your business’s fiscal health.
As highlighted before, businesses not generating profits cannot distribute dividends and any such measure taken by an owner or director may severely jeopardise the business.
Although disbursement of dividends can lead to lower taxes, it’s noteworthy that dividends do not contribute towards your National Insurance Contributions (NICs).
This may have potential effects on certain state benefits and pensions. Hence, it’s critical to bear this in mind while determining your salary-to-dividend ratio.
If you’d like more information and advice regarding dividends, please get in touch with us today.
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