If you have a Limited Company, then you might know all about tax efficiency but paying yourself dividends as well as a salary is one of the most efficient ways of taking money from your business. So, how often can dividends be taken and how does it work?
Dividends – What Are They?
This is a part of the profit that your company generates and it is paid to shareholders. The profit is anything that is left once all of your expenses have been paid. Over time, this money can accumulate but it might seem confusing as to what you can pay yourself and how often dividends can be taken.
How Much Can Be Paid By My Company As a Dividend?
There is no absolute limit or set figure and you might choose to give shareholders different amounts of dividends. This comes from the profits of your company and so, the amount you pay might alter based on the amount of profit that is available. If you don’t have any retained profits then it’s not possible to make dividend payments.
When Can A Dividend Be Paid By My company?
There are no set rules about when or how often dividends can be paid which means that you can choose to pay yourself or shareholders at any time. However, if you are withdrawing ad-hoc payments throughout the year then this can highlight that there might be issues with the way in which you are managing funds. What most businesses do is give out dividends every three to six months once the retained profits have been identified.
The Amount of Tax You Pay is Impacted By The Timing of Dividend Payments
Profits can alter dramatically from one year to the next but in a good year, you might decide to be smart when paying dividends, only taking them when things get difficult. This will make it possible to create a regular income and that can also help with financial planning and can help to avoid paying the higher rate of tax.
So, if you generate a profit of £50,000 in one year and then £10,000 in the next year, over the two years, the total will be £60,000. Therefore, to avoid paying a bigger dividend in the first year and then a smaller amount the following year, you can choose to give yourself £30,000 of dividends each year. This creates a regular income but will keep you under the threshold of the higher tax rate, ensuring you pay less tax.
What is the Tax-Free Dividend Allowance?
For 2022/23, the tax-free dividend allowance is a total of £2,000 and this can be used alongside the £12,570 of tax-free personal allowance. Any dividends that you pay yourself outside of this amount will then be taxed. The amount of tax that you pay will be dependent on the tax band you are in although the rates are not as high as income tax which is why dividends are considered to be tax efficient.