What are Dividends?
A dividend is a payment a company can make to shareholders if it has made a profit. You cannot count dividends as business costs when you work out your Corporation Tax.
Your company must not pay out more in dividends than its available profits from current and previous financial years.
If you invest in shares in a company, there are two ways you can earn money. They can grow in value, allowing you to make a profit when you sell them. Companies can also distribute some of the profits they make to shareholders annually in the form of a dividend.
Dividends can be a useful way of generating a regular income from your investments. As with any income you earn, you may have to pay tax.
The tax rates on dividends are different to the income tax rates you pay on savings interest, your salary or your pension. You will get a tax-free dividend income allowance. This allows you to earn thousands of pounds in dividend before you pay tax.
Dividend income tax changes in April 2018
Announced in the 2017 Spring Budget, the dividend tax-free allowance is being reduced.
From 6 April 2018, the first £2,000 you receive in dividends from investments will be tax free, down from £5,000. This means that more people will end up paying tax on the dividends they earn.
So how much more dividend tax will I pay in 2018?
The reduction in the tax-free dividend allowance could have a significant impact on your tax bill.
For example, if £10,000 of dividends were earned in a year:
- A basic-rate taxpayer would see their dividend tax bill increase by £225
- A higher-rate taxpayer would see their dividend tax bill increase by £975
- An additional-rate taxpayer would see their dividend tax bill increase by £1,143
You must pay dividends to all shareholders.
To pay a dividend, you must:
- hold a directors’ meeting to ‘declare’ the dividend
- keep minutes of the meeting, even if you’re the only director
For each dividend payment the company makes, you should write up a dividend voucher showing the:
- company name
- names of the shareholders being paid a dividend
- amount of the dividend
You must give a copy of the voucher to recipients of the dividend and keep a copy for your company’s records.