Tax Rates 2023/24
Download our new guide to give you all the latest information on the 2023/24 tax rates.
Taking Dividends as an Income from Your Company
23 May 2023
If you’ve never really given any thought to using dividends in your tax planning arsenal, then now’s a good time to do so.
Many directors choose to take the majority of their income in the form of dividends. It’s a great tax-efficient way to generate a regular income from your investments, but as with any form of income, you may have to pay tax on it.
The main benefits of taking dividends are that they attract lower rates of income tax than salary and no National Insurance Contributions (NICs) are payable. So essentially, by taking most of your income as dividends, you can significantly reduce your Income Tax bill.
YOUR DIVIDEND ALLOWANCE
In addition to your Personal Allowance (the amount of income you can earn each year without paying tax), you have a tax-free dividend allowance.
• In 2023/24, the dividends tax allowance is £1,000.
• By 2024/25, the allowance is set to shrink to £500.
You’ll need to ensure you draw sufficient funds from your company to use up all your allowances and basic rate band to minimise the tax paid at higher rates in later years. If you’re earning over £100,000, you may need to plan to avoid losing your Personal Allowances.
You’ll pay tax on a dividend income above the dividend allowance, as follows:
• Basic rate taxpayer: 8.75%
• Higher rate taxpayer: 33.75%
• Additional rate taxpayer: 39.35%
But it’s worth noting dividend tax doesn’t apply to investments held in a stocks and shares ISA, junior ISA, lifetime ISA, or pension.
DIVIDEND DRAWBACKS
PROCEED WITH CAUTION…
Whilst there are plenty of ‘pros’ for taking your income mostly in the form of dividends, there are a few limitations to be mindful of.
• Dividends can only be paid when there are post-tax profits to distribute (unlike salary, which is a tax-deductible expense).
• If you rely on dividends too much, your income could become unpredictable.
• Dividends don’t count as ‘relevant UK earnings’ for the purposes of tax relief on pension contributions you make.
• You need to be aware of any personal tax liabilities relating to dividends.
If you’re looking to take dividends as an income from your company, it’s important you have a trusted financial advisor and accountant at the end of the phone to support with declaring profits and account for dividends in good time so you don’t run into any problems.
Fortus can also help you work out which payment method is the most tax-efficient for you and your company, as this in itself can be quite complex.
It’s a good idea to undertake an annual dividend planning exercise, and our experienced Wealth Management, Tax, and accounting teams will come together to advise on how best to control your tax planning moving forward.
An important note: Tax treatment depends on individual circumstances and tax rules may change in the future. Content correct at time of publishing.
