Over the last few weeks we have been looking at dividends and how they work! Here is a brief explanation of what they are, how they are processed and how your taxed on them.
What are dividends in relation to my company?
Dividends are payments to directors and/or shareholders from the profit of a company.
How does this affect my company financially?
Dividends are taken from the companies equity by debiting Retained Earnings and crediting Dividends Payable
How are dividends taxed?
Example from HMRC website (https://www.gov.uk/tax-on-dividends)
You get £3,000 in dividends and earn £29,500 in wages in the 2020 to 2021 tax year.
This gives you a total income of £32,500.
You have a Personal Allowance of £12,500. Take this off your total income to leave a taxable income of £20,000.
This is in the basic rate tax band, so you would pay:
20% tax on £17,000 of wages
no tax on £2,000 of dividends, because of the dividend allowance
7.5% tax on £1,000 of dividends
How do I declare my dividends?
Dividends are declared to HMRC through your yearly self assessment tax return if you already complete one or speak to HMRC and ask them to change your tax code for tax to be collected via PAYE.