What do you mean by a dividend?
A dividend is a tax-advantaged payment provided to shareholders of a limited corporation. The dividend payment is only possible if your firm has enough earnings after paying the year’s corporation tax.
Understanding dividends:
First, it’s critical to comprehend how dividends function since they differ from bonuses and other types of compensation. We may define dividend as the distribution of a company’s profits (after corporate tax) to its shareholders.
It can only be voted on if the corporation has sufficient and accumulated earnings; otherwise, it is practically an unlawful dividend. Per the firm’s records, dividends are considered differently from salary since salaries are tax-deductible for the company and lower the corporation tax payable.
Most business directors and shareholders know that dividends are taxed at a lower rate than wages. This is because of the fact that the firm paying the dividends does not receive corporation tax relief on the dividends paid.
This lower rate of personal tax has been gradually eroded, beginning with the government’s introduction of a £5000 tax-free dividend allowance for all taxpayers, which was later reduced to £2000 in 2018, after which tax is to be paid at different tariffs depending on the total income of individual recipient.
The dividend tax due will be determined by the amount of income and capital gains received during the tax year. Dividend tax rates are currently as follows (after the £2,000 allowance): Rates are 7.5 per cent for the basic rate, 32.5 per cent for the higher rate, and 38.1 per cent for the additional rate.
This will increase by 1.25 per cent in each tax bracket for the 2022-23 tax year.
How can you avoid paying higher dividend tax rates?
Only dividends that fall into the higher rate category are taxed at a higher rate. Shield Accountancy advises clients to make dividend payments to themselves only up to the higher tax band. Any unpaid dividends can be left in the company to accumulate.
If a corporation has numerous shareholders, each will have its allowance and higher rate tax bracket. If a corporation has £100,000 in dividends available and three shareholders control 33.33 per cent of the company, each might receive £33,333 in dividends and avoid paying the higher rate of tax.
What can I do with the money I’ve saved?
- Loan the funds to another business, such as a real estate investment firm or a fresh start-up.
- Reinvest in the business.
- If you decide to close the firm down, keep the cash in the company and work for a member’s Voluntary Liquidation. Using entrepreneur’s relief to decrease capital gains tax to only 10%, this method of firm closing is extremely tax effective.
- If your firm is profitable, you can withdraw as a dividend in future tax years.