OK! So someone has advised you to buy shares of a profitable UK company to earn some money time after time. If you have followed it, indeed, you have made a great decision. This amount is called a dividend and you’re a shareholder. But you might be asking, “How do dividends work in the UK?” After reading this short blog, you’d get your answer. Enjoy reading!
This blog is equally beneficial for limited company owners, directors, shareholders, and the ones who are new to the business world. If you’re a first-time owner of a limited company in the UK, you need to know how dividends work in the UK. In addition, directors decide the payments of dividends as per the law. Therefore, they should be well aware of it. And finally, shareholders are the recipients of dividends, hence they should know how do dividends work out in the UK?
Let’s explore it!
Dividends – What are they?
A Dividend is a share of the money that is given to the shareholders when a limited company earned a profit. It is only distributed to the shareholders after paying all the liabilities, business expenses, and the due taxes including VAT and Corporation Tax.
Dividends are the source of passive income for shareholders. They are paid against the investment of stock, a shareholder owns in a limited company. Generally, they are paid once a year or twice a year, but they can be paid on a monthly and quarterly basis. For instance, if your dividend is £20 a year and if you have 10 stock shares, you’d get £200 in a year.
If you’re an owner of a limited company, most probably you’d have shareholders and you can be a shareholder yourself.
How Do Dividends Work In The UK?
In the UK, every company has its own rules regarding payment and payment timing of the dividends. Most of the companies pay dividends on their profit, but some companies also pay them against their retained earnings to maintain a long-term relationship with the shareholders. In the UK, it is compulsory for a company to pay all its taxes and expenses before paying dividends.
Some dividends are paid on an annual basis at the end of the financial year, while some are paid monthly, quarterly, or semi-annual basis. The former are called Annual dividends and the latter are known as Interim dividends.
The company is not liable to pay tax on the dividends paid, nevertheless; the shareholders need to pay tax on them. The investors of the UK can get a £2000 exemption from the number of dividends received.
Let’s see how they are issued?
How Dividends are Issued:
As a business owner, you should know how to issue dividends. It is a simple and easy process described below:
- The first thing before issuing dividends is to make sure that whether your company is making a profit or not. To find out, you simply need to check the records of your balance sheet and Profit and loss statement. In case, if you’re not making a profit, you shouldn’t announce dividends.
- After ensuring that your company is making a profit. Call a directors’ meeting to finalize whether to pay dividends or not.
- Then you should prepare tax vouchers for your shareholders. It is a detailed document showing the net dividend amount and tax credits. It provides details of the shareholders and your company.
- Afterward, you need to issue the dividends along with a tax voucher to the shareholders.
- Lastly, you should update and record all the accounts in time.
Taxes on Dividends in the UK:
The answer to “how do dividends work in the UK” is incomplete without knowing the taxes levied on dividends.
You are liable to pay tax if you receive dividends exceeding £2000. You should note that you have a personal allowance of £12,500 (visit HMRC for details), the dividend tax is applicable after using this allowance.
There are three income tax bands to pay dividend taxes in the UK. The first is the basic tax rate that is 7.5% if you pay dividends between £2000 and £37,500 after utilizing your personal allowance. The second band holders would pay 32.5% if you’re getting dividends payments of £37,501 and £150,000. The extra tax rate of 38.1% applies if your dividends payment is above £150,000.
Need help? No worries! Our professional chartered accountants in London are available to reduce your tax burden.
Tax-Efficient Way to Receive Dividends:
Being the owner and shareholder, you have the choice to get dividends as a whole. But the advisable practice is to pay yourself a low-salary and receive the amount on the dividends. As wages are considered business expenses but dividends are not.
Income tax does not apply to the dividends received, but companies pay 20% of the profit from where dividends are paid to shareholders.
We suggest you receive low-salary and dividends. As your company would get 20% corporation tax relief on the employees’ salary. This will also save you from national insurance and income tax. Further, you can receive an amount from the profit as a dividend.
Quick Sum up:
Dividends can help you to secure your taxes as an owner and a shareholder of a limited company. Hopefully, with the help of this information. You’re now confident to answer “How do dividends work in the UK?”
But, no matter how much you know about dividends, they can be tricky due to the changing laws. Therefore, we strongly suggest you contact an accountant for expert advice. A good accountant will assist you to save your taxes. An accountant can lead your business to the right path to achieve long-term success.
Contact us anytime to consult an accountant!
Disclaimer: This blog is published for informational purposes only, providing general information on the topic. It doesn’t provide any specific or expert financial advice or suggestions in any form. You are advised to contact an accountant for professional financial advice. The figures and data may vary from time to time. All the opinions written above are the subjective views of the writer. We are not responsible for any errors, omissions, damages, and loss arising from the use and display of the above data. These ideas do not necessarily portray the views of Accotax and its staff.