UK business owners must know how much money their firm may pay out in dividends. Dividends are an important source of income; therefore (inevitably), you will need to pay tax on any that you receive. It may appear perplexing since the dividend tax rate differs from the income tax rate you may pay on other forms of earnings.
There are important changes in tax rates that you should be aware of as the 2023–2024 financial year comes to an end, and many of us file our self-assessments. These adjustments impact your ability to keep a portion of your company's profits.
Engaging a tax accountant, London, will help you manage your dividend taxes, ensuring compliance with revised rates and maximising profit retention.
What are Dividends?
Dividends are payments companies give their shareholders if they have made a profit. They are a flexible way of managing your income and can be more tax-efficient compared to taking a bigger paycheck.
Dividends have a far lower tax rate due on them than other types of income, such as salaries, and are not subject to National Insurance. This indicates that taking money from a limited company through dividends is typically a tax-efficient option.
Anybody who is a shareholder in a company will usually receive a dividend payment based on the number and type of shares they have.
In addition to being mere investors in the business, shareholders may also be directors, workers, or even family members. Being a shareholder does not make you a director. However, it is usually common for someone to be both, particularly in smaller businesses.
Key Changes in Dividend Tax 2023/24
You should be aware of the significant changes to dividend taxation that will occur in the 2023–2024 fiscal year. Let us break down what is new and what does it mean for your wallet.
Decrease in Dividend Allowance
The total amount of tax-free dividends you can receive in a year is known as the dividend allowance. It is separate from the personal tax allowance, and you can utilise both. Hence, there is no dividend taxation up to the allowance threshold, irrespective of any other income you receive.
The dividend allowance has been reduced to half, from GBP 2,000 to GBP 1,000, for the 2023–2024 financial year (the allowance will reduce again for 2024/25 (to GBP 500). As a result, you can now receive dividends of up to GBP1,000 without having to pay tax on them.
This tax-free buffer used to be GBP 2,000. Even while this adjustment seems small, it can have a significant impact on your tax liability, particularly if you depend significantly on dividend income.
This means that business owners and individual investors need to be more strategic about how they extract profits from their businesses. Should you have a sizable dividend income, the reduction in allowance may result in increased tax liabilities. This should serve as a reminder to review your income plan and maybe look into additional tax-efficient strategies to compensate for this change.
Rates of Tax on Dividends for 2023–2024
The tax band determines your tax rate on dividends you are in after deducting any additional income you may get from your total dividend income. You may pay various rates of tax in each band since taxation is based on marginal bands.
In spite of the change in allowance, the actual dividend tax 2023/24 rates on dividends over GBP 1,000 have not changed. Nonetheless, understanding these tax rates is still essential:
Personal Allowance
There is no tax on the first GBP 12,570 of your income. This covers income from salaries, dividends, and other sources.
(i) Base Rate
The dividend tax rate on dividend income ranging from GBP 12,571 to GBP 50,270 is 8.75%. For basic rate taxpayers, this is where the majority of their dividend income falls.
(ii) Higher Rate
The tax rate for dividend income ranging from GBP 50,271 to GBP 125,140 is 33.75%. You must pay more attention to how dividends affect your tax if you fall into this category.
(iii) Additional Rate
For those earning above GBP 125,140, the tax rate is 39.35%. Careful tax planning becomes essential in this higher band. In such cases, approaching a tax accountant, London, is crucial. They assist in navigating the complex tax landscape optimising outcomes through careful tax planning, especially at higher tax rates.
Therefore, while the rates of taxes remain unchanged, the decreased allowance implies that more of your income from dividends will be subject to these rates. This must be taken into account when determining how much income to take as dividends.
Keep in mind that the objective is to balance your sources of income so that you can satisfy your needs financially and minimise your tax liability.
How to Compute Tax on Dividends
Understanding how much tax you will have to pay on your dividends does not need to be an ordeal. This simple, step-by-step instruction can assist you in calculating your dividend tax.
Check Your Total Income: To begin, total up all of your sources of income, including dividends, rent, salary, and other sources. This total determines your tax bracket.
Apply Your Personal Allowance: Each person is entitled to a GBP 12,570 tax-free personal allowance. You are not liable for dividend tax if your total income falls under this range.
Determine Dividend Income: Deduct your other income and personal allowance and deduct it from your overall income. Your dividend income is the remaining amount.
Utilise the Dividend Allowance: You won't pay taxes on the first GBP 1,000 of your dividend income. You won't have to pay any further taxes on your dividends if they are less than this!
Tax the Remaining Dividends: For any dividends exceeding GBP 1000, apply the relevant tax rate. Recall that the basic rate is 8.75%, the higher rate is 33.75%, and the extra rate is 39.35%.
Compute Your Tax Liability: Calculate your overall dividend tax liability by adding the taxes from each band.
How and When Should I Pay Dividends To Myself?
You are free to pay out dividends as often as you want as long as you abide by the rules. Although some opt to pay either bi-annually or yearly, the majority of corporations pay dividends every quarter.
Yes, even if you're the sole director, you must call a directors' meeting to declare the dividends and record this in the minutes. You must provide a dividend voucher for each dividend you declare, which must include the date, the name of the firm, the shareholder names, and the dividend amount.
How Can Unicorn Accountants Help You?
It can be difficult to manage your finances and deal with dividend tax, but with the right plans and expert advice, it doesn't have to be. You can make the most of your hard-earned money and ensure smooth financial management by being aware, planning, and getting professional advice from leading accounting companies, London, like Unicorn Accounting, whеn necessary.
To learn more about how Unicorn Accountants can help you, contact our team of professionals right now.