If you are both a shareholder and employee of a limited company than you can draw income both as a salary and as a dividend payment from the company’s profits. The difference between these is that any salary over £8,424 will be subject to National Insurance contributions, while dividend payments are not. First off, you need to make sure that you make use of your dividend allowance prior to the 5th April 2019. If you don’t do this, you are missing out.
USING YOUR £2,000 DIVIDEND ALLOWANCE
Dividends are payments made from profits to the shareholders of a company, a return on investment. You have a £2,000 tax-free allowance for any dividend income you receive in the 2018/19 tax year (and in 2019/20). You are taxed on any further dividend income you receive at different rates according to how high that is as follows:
Basic rate: 7.5% on dividends up to £34,500
Higher rate: 32.5% on dividends above the basic rate up to £150,000
Additional rate: 38.1% on dividends above £150,000
You may receive dividends from a number of companies in which you hold shares. When paying dividends, the company will advise you of the amount payable in the form of a dividend voucher, similar to a pay advice note. This will show the gross dividend payable, usually indicated as Xp per share multiplied by the number of shares you own in the company.
If you pay a higher rate of tax, you may be liable to pay additional tax on your dividends. Also, remember that any dividends you receive on shares held in an ISA are not subject to tax and need not be considered here. Where you receive dividend income in this tax year over £10,000 and do not normally complete a tax return, you are required to register for Self-Assessment by the 5th October with HMRC.
HOW DOES YOUR DIVIDEND ALLOWANCE WORK WITH YOUR PERSONAL ALLOWANCE?
Keep in mind that your dividend allowance will often pair up with your personal allowance. The challenge, then, will stem from what tax you might have to pay taking into account income derived from other sources. You have a personal allowance of £11,850 for this tax year. Once you have used up your dividend allowance of £2,000, it all comes down to your other taxable income.
You can use any unused personal allowance to offset additional dividend income over £2,000. This could help you to make sure that you pay less tax on your dividends, especially if these are your primary income source.
Where you are both a shareholder and employee of a company, you might want to consider the following example. Say you pay yourself a a salary of £8,424 (this is the 2018/19 National Insurance Primary threshold) for the tax year, you can then take up to £5,426 in tax-free dividend income.
This would see you use your remaining personal allowance of £3,426 (your personal allowance minus your salary), as well as your £2,000 dividend threshold. Dividend income that falls within your personal allowance does not count towards your dividend allowance.
Further dividend income up to £34,500 would then be subject to a 7.5% tax rate. This means you can issue up to £37,926 in dividends from your company along with the salary of £8,424, to stay within the basic rate dividend income band.
CAN YOU PAY YOUR DIVIDEND OUT OF PROFITS AND LOSSES?
Make sure that you only ever pay dividends out of the profits of your company. If you choose to pay yourself a dividend from a company that reports a loss, then you may be seen as taking a Director Loan. These fall into a totally different tax category, and as such you should look to learn more about this should the situation arise.
Therefore, it’s recommended that you only take dividends when your company turns a profit.
GETTING THE HELP THAT YOU NEED WHEN HANDLING THE TAX YEAR END
At Devonshire Green, we can help you to make the most of your dividend allowance. With the tax year end just around the corner, it’s important that you don’t wait around. There’s only a short amount of time until your dividend allowances for 2018/19 will no longer be valid, so it is essential that you move as soon as you possibly can.
If you choose to do this, then we can make sure that you utilise all of the tax saving options available to you, to fit your circumstances. For a more personal appraisal of your dividend situation and how you can use any allowances to your advantage, be sure to contact us today.