Dividends can be paid out of the post-tax profits of a limited company to its shareholders. If you are paying out interim dividends during the year from your limited company, it is a legal requirement to ensure that the company has made sufficient profits to pay these (after allowing for the Corporation tax liability).
Depending on the share structure of your company, you may be able to pay dividends on the different classes of shares, but these must always be in accordance with the number of shares each individual holds of that particular class. If you only have one class of ordinary shares set up in your company, then dividends must be paid to all shareholders in accordance with their shareholding.
Dividends are treated as “income” for the shareholders and Income Tax will be calculated based on their total income. There are separate Income Tax rates for dividend income compared to other forms of income. Dividends are always declared and paid net of a notional tax at a rate of 10%. This 10% tax credit it not actually paid by the shareholder or the company – it is treated by HMRC as a deemed payment of tax.
If the recipient of the dividend is not a higher rate taxpayer, then no further Income Tax will be due on the dividend. Higher rate taxpayers will be liable for an additional Income Tax charge on any dividends exceeding the higher rate threshold.
As dividends are not treated as earnings, there is no NIC payable. Due to the NIC saving, it can be a tax-efficient strategy to pay a low salary and take the remainder of the drawings as dividends.
You should consult with your accountant beforehand to agree an appropriate profit extraction method for your business after considering your personal circumstances
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