A dividend is a sum of money that you might receive if you own shares in a profitable limited company. Only limited companies can pay them. If you’re a sole trader, you won’t be able to extract dividends as income from your business.
In order to pay shareholders dividends, the limited company directors have to all get together to “declare” the funds that they’ll be releasing.
The payment can only come out if the company makes a profit – and it’s deducted after Corporation Tax and VAT. Dividends are a very tax efficient method of extracting income from a company.
Do I have to pay tax on a dividend?
Dividends are taxed at a different rate from most other types of income. Take a look at the table below to see what you might owe in the 2020/21 tax year.
|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%|
A few other things to bear in mind about dividends are:
- You don’t need to pay any National Insurance contributions for your income from them
- Dividends from Stocks & Shares ISA accounts are entirely tax-free
- The Dividend Allowance entitles you to earn your first £2,000 tax-free
How do I pay tax on dividends?
This depends on how much you earn.
- If you earn between £2,000 and £10,000, you can either do a Self Assessment tax return or pay through your PAYE tax code
- If you earn over £10,000 from dividends, you have to file a Self Assessment tax return
Calculate what you owe
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