If you’re a small business that owns a limited company then listen up - this one’s for you!
We all know what a pain it is to put your hard work into earning income for your business only to see the tax man take a big chunk of that away. The good news is, by using dividends to pay yourself you can save on tax, meaning more money left in your pocket. Interested? Read on.
A dividend is a payment that a profitable company can make to shareholders. The amount you pay can’t be more than your total profits for your current and previous financial years and it doesn’t count as a business cost when calculating Corporation Tax. The tax you pay on your dividend will be paid by you, usually through a Self Assessment return.
So if you still have to pay tax why should you bother dealing with these dividends? Well you get an extra tax-free allowance for dividends (on top of your regular personal tax allowance) and lower tax rates too.
Mind-boggling, isn’t it? Let’s break it down.
The following figures are based on tax percentages for England and Wales in the tax year 2019-20.
Let’s say you’re a director and pay yourself a salary of £12,500 and dividends of £50,000. On your salary you would pay £0 tax as it is within your personal tax allowance. On the first £2,000 of your dividend payment your tax would be £0 (tax allowance). The next £35,500 of your dividend will be paid at the basic dividend tax rate of 7.5% (£2662.50). The remaining £12,500 of your dividend will be paid at the higher dividend tax rate of 32.5% (£4,062.50). A total tax bill of £6,725.
If instead you were to pay yourself the full £62,500 as a salary it would work out as £12,500 still tax free, the next £37,500 at 20% (£7,500) and the remaining £12,500 at 40% (£5,000). A total tax bill of £12,500. You can read more about this on our blog post: Dividend Tax Allowance: Should I take a dividend or a salary?
So if you’re raring to go, here’s how to get started with paying yourself in dividends.
First, you need to hold a directors meeting to declare the dividend, even if you’re the only director. Minutes need to be taken at the meeting and records formally kept - if it’s just you then it’s the paperwork that’s most important. For each dividend payment you need to write up a “dividend voucher” that shows:
Remember, if you use dividends to pay your income that could be one monstrous tax bill saved!
Looking for more help with your business accounting? At Mazuma we’re here to lend a hand. You can sign up with us at anytime in the year. For more information you can get an online quote, call us on 0333 0143369 or drop us an email to email@example.com.