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What are dividends and why would you want to take them out?

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A relatively early decision to make after you’ve formed a limited partnership is how you plan to withdraw money from your business account and pay yourself personally. Along with salary and potentially a director loan, this is where dividends come into the equation.

In this guide, we’ll go over everything you need to know about dividends, from what they are, the reasons for extracting them, and the tax implications.

What is a dividend?

A. dividend It is a sum that is paid to a shareholder with the profits obtained by a company. This means that dividends can only be extracted if there is enough money left to pay all the obligations of a company, such as taxes and overhead.

Dividends vs salary: what is the difference?

So are dividends the same as salary? No, although they both count as income, they are quite different from each other, with contrasting tax implications.

A dividend is paid from the earnings available to the shareholders of the company after all taxes and business expenses have been accounted for. The person who receives the dividend will be responsible for any taxes owed on the issued dividends, not the company.

Salary, on the other hand, is paid to employees (and often directors as well) and is treated as a business expense. In other words, any salary paid to employees, plus employment costs, reduces the profit your business makes and therefore reduces your corporate tax bill.

Do dividends contribute to contribute to tax efficiency? If so, how?

Many directors of corporations pay themselves a low salary, which is then topped up with dividends. But why? Well, the combination of a low salary and dividends means that you can legitimately qualify for lower tax rates than you would if you paid yourself in full.

This is mainly because dividends are not subject to national insurance contributions (NIC). By contrast, salary paid above the tax-free threshold (£ 8,440 for 2021/22) attracts IAS from employers.

However, it all depends on your circumstances. As a director of a limited partnership, you can choose from a variety of options when it comes to paying yourself in income.

Are dividends taxable?

So how much tax is paid on dividends? First of all, the annual dividend allocation means that you can receive up to £ 2,000 in dividends, tax-free each year. This is in addition to your Personal Allowance, which is the amount you can earn before paying any tax (£ 12,570 for 2021/22). After that, your dividend tax rate depends on your income tax band. We’ve broken things down below.

headband Tax rate Received amount
Personal authorization 0% £ 12,570
Dividend subsidy 0% £ 2,000
Basic rate 7.5% £ 14,500 – £ 50,270
High score 32.5% £ 50,271 £ 150,000
Additional fee 38.1% £ 150,000 +

How often are dividends paid?

Whenever you want. In addition to contributing to tax efficiency, another benefit of dividends is that you can extract them when you need them; They offer flexibility, which is important for tax planning and managing your personal cash flow.

Just be sure to extract dividends from earnings – eat the money owed to HMRC or debtors and you will find yourself in trouble.

How is a dividend issued?

Each dividend must be declared after a meeting has been held between the directors of the company. When the amount of the dividend has been agreed upon, a ‘dividend voucher’ should be drawn up showing:

  • Dividend issue date
  • Company name
  • Name and address of paid shareholders
  • Dividend amount
  • Number of percentage of shares owned by the recipient of the dividend
  • Signature of the director of the company

The shareholder should then receive a copy of the dividend voucher, which should also be kept for their company records. If you have a accountant, they can take care of this easily.

So there you have it. Everything you need to know (initially at least) about earning dividends as a way to pay yourself through your limited partnership. And remember, for more information and expert support in this area, don’t hesitate to enlist the help of a trusted accountant.

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