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The dividend allowance is a tax relief that allows you to earn a certain amount from dividends each year, tax-free.
A dividend is a payment that’s made to shareholders from a company’s (limited company) profit each year. It can only be calculated once Corporation Tax, VAT etc. has been deducted.
It’s income favoured by many because it’s such a tax-efficient method of taking money from a business. The rate of tax that you pay on dividends is lower than the rate you pay on either your salary or your pension.
Whenever a company creates a dividend, they need to have a meeting with all of the directors to “declare” it and then a voucher is produced with the following information:
Any earnings above the allowance are liable to be taxed at the below rates:
|Annual salary||Tax bracket||Tax rate|
|Up to £12,500||Personal allowance||0%|
|£12,501 – £50,000||Basic rate||7.5%|
|£50,001 – £150,000||Higher rate||32.5%|
In order to pay tax on your dividends, you’ll need to do a Self Assessment tax return. You can either do this yourself via HMRC online or we can get it sorted for you at TaxScouts.