Running a limited company in the UK comes with various financial benefits, one of which is the ability to take dividends as part of your income.
Dividends are a way for business owners and shareholders to extract profits from the company. However, it's important to understand the rules and procedures involved in taking dividends as salary from your limited company to ensure you stay compliant with UK tax laws. In this blog post, we'll walk you through the steps and considerations when taking dividends as salary from your UK limited company.
Understand the Basics
Before diving into the process, let's clarify what dividends are and how they differ from a regular salary:
- Dividends: Dividends are payments made to the shareholders of a company out of the company's profits. They are typically distributed periodically, such as quarterly or annually.
- Salary: A salary is a regular payment made to company directors and employees in exchange for their work. It is subject to income tax and National Insurance Contributions (NICs)
- Ensure Profitability- To pay dividends, your limited company must have sufficient profits. You cannot pay dividends if the company is not making a profit, as it's illegal to distribute dividends that exceed your available profits. Make sure your company's financial records are accurate and up to date before considering dividend payments.
Declare Dividends at a Shareholders' Meeting
To pay dividends, you'll need to declare them at a shareholders' meeting. This meeting can be held informally if you are the sole shareholder, or more formally if there are multiple shareholders. Document the decision to pay dividends in the company's minutes.
Determine the Dividend Amount
The amount of dividends you can pay depends on the company's available profits. It's crucial to work with your accountant or financial advisor to calculate the maximum dividend amount you can distribute without risking insolvency or breaking the law.
Check Your Dividend Vouchers
Once you've decided on the dividend amount, you should issue dividend vouchers to each shareholder. These vouchers should include:
- The company's name and address
- Shareholder's name and address
- Date of the dividend payment
- Amount of the dividend
- A statement confirming the dividend has been paid from the company's profits
- Keep Accurate Records
Maintain accurate records of all dividend payments made by the company. These records should be kept for at least seven years, and they will be crucial for tax purposes and compliance.
Tax Considerations
Dividends are subject to different tax rules than regular salary income. In the UK, you can receive a certain amount of dividends each tax year without paying income tax. This amount is called the "dividend allowance." As of my last knowledge update in September 2021, the dividend allowance was £2,000. Any dividends received above this allowance are subject to dividend tax rates.
Reporting Dividends
You should report any dividend income on your self-assessment tax return. Make sure you accurately report all dividend income to avoid any penalties or tax-related issues.
Seek Professional Advice
The process of taking dividends as salary from your limited company can be complex, and tax laws may change over time. It's highly advisable to consult with a qualified accountant or tax advisor, such as us at Amanah Accountants, who can provide guidance tailored to your specific situation.
Taking dividends as salary from your limited company in the UK can be a tax-efficient way to extract profits, but it requires careful planning and compliance with relevant laws and regulations. To ensure you're making informed decisions and staying on the right side of the tax authorities, seek professional advice and maintain accurate financial records. By doing so, you can enjoy the financial benefits of being a limited company owner while safeguarding your financial stability.