A limited company is a type of business structure in which the company's shareholders have limited liability for the company's debts. Dividends are payments made by a company to its shareholders out of its profits. As of 2023, limited company dividends are taxed differently than other forms of income, such as salary or wages.
In the United Kingdom, dividends are paid out of the company's after-tax profits and are subject to a special tax rate. For the tax year 2022-2023, the first £2,000 of dividends are tax-free. Dividends above this amount are taxed at 7.5% for basic rate taxpayers, 32.5% for higher rate taxpayers, and 38.1% for additional rate taxpayers.
It's important to note that dividends can only be paid out of profits that have already been subject to corporation tax, so the company must have enough profit after tax to pay dividends. If the company does not have enough profit, it will not be able to pay dividends, even if it has retained earnings.
When a company pays dividends, it must also pay dividends tax to HM Revenue and Customs (HMRC). Dividends tax is calculated and paid as part of the self-assessment process for individuals, and must be reported on the individual's tax return.
For a limited company, dividends can be an attractive way to take money out of the business because they are generally taxed less than salary. However, it's important to consider the overall tax position and the company's financial position before deciding to pay dividends. It's also important to keep accurate records of the dividends paid and the tax paid on them, as failure to do so can result in penalties from HMRC.
It's also worth noting that dividends can only be paid to shareholders and not to directors, and the company must have enough distributable profits to pay dividends. It's also important to keep accurate records and minutes of any dividends decision to be able to justify the dividends paid to HMRC if they ask.
In summary, limited company dividends are a way for shareholders to receive a portion of the company's profits, but it is important to consider the overall tax position and the company's financial position before deciding to pay dividends, and to keep accurate records of dividends paid and the tax paid on them.