Many entrepreneurs set up a limited company for business because it is easy, quick and affordable to incorporate a limited company in the UK. One of the ways they can withdraw money from their companies is through dividends payments. You must declare the dividend from your small company in your self-assessment return.
Before declaring your dividend
Generally, you can only declare a dividend from your small company when you have sufficient profits available for distribution after paying corporation tax.
You will include the dividend declared in your company’s profit and loss account and also in your balance sheet as the dividend payable if the dividend will be paid after the accounting year ended.
Dividend Received
For example, you are the sole director and shareholder of your limited company. Your company made a profit of £100,000 before corporation tax and after your director’s salaries a total of £50,000. The corporation tax rate is 20%. You would like to withdraw £8,000 from your company.
| Profit and loss account | 2021 |
|---|---|
| Profit before tax | £100,000 |
| Less: corporation tax @ 20% | (£20,000) |
| Profit after tax | £80,000 |
In this instance, you can pay yourself a dividend of £8,000. Correspondingly, you must declare this dividend received from your limited company in your self-assessment return. You must register with HM Revenue and Customs to get your Unique Tax Reference (UTR) number for filing your self-assessment return.
Dividend allowance
The great news you do not pay tax on the full amount of dividend of £8,000 received. The UK government is kind, understanding and generous to the taxpayers.
| Tax year | Dividend allowance |
|---|---|
| 6 April 2020 to 5 April 2021 | £2,000 |
| 6 April 2019 to 5 April 2020 | £2,000 |
| 6 April 2018 to 5 April 2019 | £2,000 |
| 6 April 2017 to 5 April 2018 | £5,000 |
| 6 April 2016 to 5 April 2017 | £5,000 |
Tax on dividend
Your company do not pay tax on the dividend you received but you do. The tax you must pay on your dividend received is depending on your total earned income for the tax year and your income tax band. Please note that the income tax band is different from the dividend tax band.
| Dividend tax band | Tax rate |
|---|---|
| Basic rate | 7.5% |
| Higher rate | 32.5% |
| Additional rate | 38.1% |
Calculate tax on dividend
| Salary | £50,000 |
| Dividend received | £8,000 |
| Total earned income for the tax year | £58,000 |
| Less: Personal allowance for 2020/2021 | (£12,500) |
| Taxable income | £45,500 |
| Tax on: | |
| Salary at the basic rate of 20% (£45,500 – £8,000) | £7,500 |
| Dividend at the basic rate of 7.5% (£8,000 – £2,000) | £450 |
| Total tax bill | £7,950 |
Confirmation statement
Another important document you must prepare for your company is your confirmation statement at least once every 12 months and submit it to Companies House. Failed to file this document may result in your company being struck off the Companies House register.
If you require help with your company accounts and your self-assessment return and confirmation statement filings, please contact our accountants and they will be more than happy to help you.
