As an owner of a limited company, you get agency over how you are paid. A route most company owners take is to pay themselves a salary through dividends. There are many benefits to paying yourself through dividends over a traditional PAYE method.

However, you may wonder: ‘What are dividends?’, ’How do they work?’ and ‘What are the benefits of paying myself in this way’. Our blog delves into these questions and more.

Disclaimer: This blog is intended for informational purposes and should not be considered as definitive financial advice. Before making any crucial financial decisions we advise you to consult with an accountant and tax professional.

• Pros and Cons of Paying Yourself Dividends vs PAYE. 

What is a Dividend 

A dividend is a portion of the company’s earnings which goes to its shareholders (owners). Dividends are often paid out in cash or in the form of other stocks/shares which can be re-invested. 

Are Dividends Tax Efficient?
 

Many company owners chose to pay themselves with dividends due to higher tax efficiency. Dividends are taxed at a lower rate than salaries and are not taxed with the National Insurance classification.

A dividend income is added to all of your other taxable income and is taxed last. This means you pay tax on dividend income based on your highest income tax band. You also get a dividend allowance of £1000, which means you will only be taxed on income above this allowance.

A shareholder may also have to pay income tax on the dividends if they are over £2000.

NB: You can not count dividends as a business cost when you work out your corporation tax. 

How to Pay Dividends
 

To pay a dividend, you must hold a directors’ meeting to ‘declare’ the dividend, during this meeting you must keep minutes of the meeting, even if it is just you.

Then you file your dividend paperwork, you must write up a voucher which states the following information: 
 

• Date 
• Company Name 
• Names of the Shareholders Being Paid a Dividend 
• Amount of the Dividend

You must give a copy of the voucher to the recipients of the dividend and keep a copy for your records. 

Looking for More? 
 

There are many factors to consider as an LTD owner. Our start-up hub is full of information to get you and your company up and running.

From information about VAT, new tax laws or our Side Hustle Series, we’re here to help.

Why not contact us and speak to our excellent customer service team to get the info you need?