The short version: A dividend is money paid out to shareholders from a company’s profits. If you own shares in a limited company, whether it’s your own business or someone else’s, you might receive dividends.
How do dividends work?
The company’s directors meet to “declare” a dividend. They decide how much to pay out based on the profits available after Corporation Tax and other obligations. Then shareholders receive their share based on how many shares they hold.
Sole traders can’t pay themselves dividends. It’s a limited company thing only.
Why are dividends popular?
Tax efficiency. Dividend tax rates are lower than Income Tax rates, and you don’t pay National Insurance on dividend income. That’s why many company directors pay themselves a small salary topped up with dividends.
How are they taxed?
There’s a tax free dividend allowance. Above that, you pay dividend tax at rates that depend on your income band. Basic rate, higher rate, and additional rate taxpayers all pay different amounts. Check gov.uk for current rates.
Dividends from a Stocks and Shares ISA are completely tax free, regardless of how much you earn.
Running a limited company and want to optimise how you pay yourself? We can help you find the right balance.
