The Dividend Allowance and Self-Employment

By May 1, 2021 Insights

Every taxpayer, regardless of the rate of tax they pay, has the right to access a tax-free allowance for dividends. This is set at £2,000  and so, if you are considering going self-employed or have recently become self-employed then you need to consider this.

The Aim of the Allowance

Should you be self-employed and have your own limited company then you can withdraw money from the company as a dividend. As well as this, you might also receive a dividend payment should you own any company shares. While it is known as dividend allowance, it is a zero rate tax band. Therefore, those dividends that fall within the allowance are not susceptible to tax although they will count towards band earnings. In instances where the personal allowance has not been used, dividends that are sheltered by the personal allowance are also free of tax.

Dividends that are not covered by the Allowance

In instances where dividends are not sheltered by either the personal allowance or the dividend allowance are taxable at the dividend rates of tax. So, if a taxpayer receives an income from different sources, the dividends are then treated as the top slice of income. So, dividend income has a tax rate of 7.5% where it falls within the basic rate band and where it falls within the higher rate band it is taxed at 32.5%. Furthermore, if it comes under the additional rate band then this is 38.1%. 

Using the Current Allowance

It’s important to remove that if a dividend allowance is not used within a tax year then it is lost. Therefore, you should consider your dividend policy and ensure that you pay dividends before the tax year ends. 

Should an individual receive dividends from both their personal company or family, depending on their shareholdings, then the income that they receive might have fallen in recent times as a result of the current pandemic. This might mean that they have the ability to pay higher dividends than usual from both the personal company or the family as a way of utilising the allowance. Despite this, it’s important to remember that retained earnings have to be used to pay dividends. 

As an example, in instances where profits are such as if you have just started a business or you have made a loss, it won’t prevent the payment of dividends. However, they can only be paid should any retained profit be brought forward be significant enough to cover any loss as well as any dividends that are paid out.

To ensure you remain compliant with the law, dividends have to be paid in alignment with shareholdings. However, utilising an alphabet structure, will enable you to work around these restrictions and will enable dividend payments to be created to use any unused dividend allowances of family members.

It’s important to seek professional advice if you are unsure about what you can and cannot claim in relation to dividends as this will enable you to remain compliant.

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