Dividend taxes in 2022/23

A dividend payment can seem complex, especially since the tax rate is different from your other income.

Maybe you've just started your business and incorporated, or maybe you've changed your structure to a limited company. If you work in business circles, you're likely to hear about dividends, but you may not know much about them. In this article, we will explain the concept of dividends, when dividends can be distributed, and how dividends are taxed if you're operating through a limited company.

How do dividends work?

Dividends are generally a tax-efficient way to withdraw funds from a limited company. Dividends are paid to shareholders from profits left over after deducting Corporation Tax. Dividend payments cannot exceed the company's profits in the current or previous year.

As a result of paying all its tax obligations (such as VAT and Corporation Tax), and expenses (such as wages and rent), a company's profit is what remains. Dividends cannot be paid if the company doesn't have sufficient profit after tax to pay them. Dividends cannot be classified as a business expense, unlike salaries.

What are the eligibility requirements for dividend payments?

Anyone who owns shares in the company can receive dividend payments in proportion to the number (and type) of shares they own. Besides investors, shareholders can also be employees, directors, or relatives of the company.

Due to tax efficiency, directors often pay themselves both a small salary and dividends.

How much tax will I pay on my dividends?

A person's tax rate on dividends is determined by the total amount of income they receive, as well as how much of that income is specifically from dividends. You won't have to pay National Insurance contributions on dividends.

Dividends and tax allowances

It is possible to use the Dividend Allowance as well as the Personal Allowance (the amount you can earn before you have to pay income tax).

An overview of the Personal Allowance for 2022/23

Before you are required to pay income tax on income, you are allowed to earn the tax-free Personal Allowance.

• As of 2022/23, the Personal Allowance is £12,570, which is tax-free.

Dividends that fall within your Personal Allowance won't be subject to tax if you aren't receiving any other income.

An overview of the Dividend Allowance for 2022/23

In addition to the Personal Allowance, dividend income is tax-free. Before you start paying tax on dividends, you can earn up to £12,570, and then take dividends up to the Dividend Allowance.

• Dividends are tax-free in 2022/23 up to £2,000.

Dividends over both your Personal Allowance and Dividend Allowance will only be taxed if they exceed the thresholds.

2022/23 Dividend Tax Rates and Thresholds

How much is dividend tax in 2022/23?

Dividend tax rates are based on the tax bands you fall into after adding your total dividend income to any other income you receive. As tax works in bands, you might pay different rates in different bands. Listed below are the tax bands for 2021/22 and 2022/23, along with the dividend tax rate in each band.

Divide your total income (including dividends) by four to determine your band. In 2022/23, dividends will be taxed at a higher rate than in 2022/22.

Dividends can be paid as often as you wish, just remember to follow the regulations. Whether you are the only director or not, you must hold a directors' meeting every time you pay a dividend.

Minutes of the meeting must also be kept. The dividend voucher must contain the date, the company name, the shareholders' names, and the dividend amount.

Should I take a salary or pay myself dividends?

A combination of salary and dividends may be the most tax-efficient way for a director and shareholder of a limited company to earn income.

You can make as much or as small a salary as you like as a director since there is no minimum wage threshold. You usually pay yourself a salary up to the National Insurance threshold and pay any additional amount as a dividend if this is your only source of income.