If you’re operating through a limited company, dividends are likely on your radar. They’re a smart way to supplement your income, and for good reason.
What Exactly Are Dividends?
Dividends are your share of the company’s profits after all the bills and taxes have been squared away. Unlike a salary, dividends aren’t subject to National Insurance, making them a tax-efficient way to take home more of your hard-earned money.
Who’s Eligible?
If you own shares in the company, you’re in. The amount you receive depends on the number of shares you hold, so it’s proportional to your stake in the business.
When Can You Take Dividends?
You can draw dividends whenever there’s enough profit in the company to do so. Just be cautious—drawing dividends without sufficient profits is a no-go and could land you in hot water with HMRC.
The Tax Side of Things
Dividend Allowance
For the 2023/24 tax year, the first £1,000 of dividend income is tax-free. But be aware, this will drop to £500 from April 2024.
Tax Rates
- Basic Rate: Dividends over your allowance but within the basic tax band are taxed at 8.75%.
- Higher Rate: If you’re in the higher tax band, expect a 33.75% rate.
- Additional Rate: Anything above £125,140 is taxed at 39.35%.
How to Settle Up with HMRC
If you’re already filing a Self Assessment, just include your dividend income there. If not, a quick call to HMRC will guide you through the process.
Quick Tips
- Documentation: Always keep a record when declaring dividends. It’s good practice and keeps HMRC happy.
- Timing: Dividends are taxed when declared, so timing can be everything.
- Consult an Expert: When in doubt, it’s always a good idea to consult your accountant.
Wrapping Up
Dividends offer a tax-efficient way to get more out of your company’s profits. But like anything tax-related, the details matter. If you have questions or need tailored advice, don’t hesitate to reach out to us at PaperRocket Accounting.
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