Company dividends: 5 things you need to know
Dividends are a really tax efficient way of getting income from your company, right? Not necessarily; and to the extent there are tax benefits, HMRC are keen to make sure you've got things right so dividends are paid correctly.
We're oftyen asked questions about dividends; here are 5 things every company director or shareholder needs to know. And if you are responsible for running a company or deciding on dividends, read our separate article setting out what you need to be aware of before you start paying dividends.
Here are the 5 most common things we need to tell clients about dividends;
Dividends are paid to shareholders, not Directors or employees.
In fact, you don't have to be a Director to be a shareholder, or vice versa.
Dividends are paid per share, not per Director
So if you have 10 shares in total, and you hold 4 with the rest held by your brother, a distribution of £50 means you get £20 and your brother gets £30, even if he's not got anything much to do with running the business.
Be careful when transferring shares to other people - especially if they're outside the family. HMRC say " Tax isn’t usually payable on gifts to your husband, wife, civil partner or a charity". In addition, if you gift shares to someone outside the family, it may be covered by "gift holdover relief" - which means they may need to pay capital gains tax when they eventually sell them, but you won't. Finally, gifts of shares in unquoted companies may qualify for "business property relief" from inheritance tax.
Dividends are paid out of profits
So if your company makes a profit of £1000 in a year (and has no profits to bring forward from previous years), then you can't pay more than £1000 minus the Corporation tax due in dividends.
Dividends are paid by the company after Corporation Tax
Even if you're paying no personal tax on a dividend, the company is generally paying corporation tax (at 19% in 2018/19) before it pays you the dividend. Salary, on the other hand, is an expense and reduces the profit if it's paid.
There are tax benefits for Directors in taking some salary and some dividends
- but the tax benefits around dividend payments are being steadily reduced. Dividends held outside tax wrappers are currently subject to a tax-free allowance of £2,000. Above that, within the basic tax rate band dividends are taxed at 7.5%, in the higher rate band at 32.5% and in the additional rate band at 38.1%.