Contractor Guide to Dividends

How do they work?

It is common for a contractor to draw some salary from the Limited Company. This is typically set at a level below or close to the thresholds for tax and National Insurance, to minimise liabilities.

Dividends don’t attract National Insurance, so they can be a more tax-efficient way to draw income once the National Insurance threshold is reached.

You don’t need to take all company profits as dividends – you can leave money in the company to maximise your tax advantage. Whether this is a good idea depends on your personal circumstances – your accountant will be able to advise.

How do I take them?

When taking dividends, your company needs to issue a dividend voucher. This is an official record of a dividend payment. Your accountant can help with this, or you can use a template. A dividend voucher needs to include:

–          Your company name

–          The shareholder’s name

–          The amount paid

–          The date

–          The signature of the company director

When can I take dividends?

Whenever you like! There is no set date that dividends need to be taken by. As long as there are available profits in the company, you can take them as dividends – the more irregular the better.

This doesn’t mean you can just draw money out of the company without planning. Dividends attract tax, using different thresholds, so you need to consider this before taking any.

So how are they taxed?

Dividend tax is tricky, as it interacts with your income tax. Managing this is one of the things you pay an accountant for!
Dividend tax breaks down as below – all figures are for tax year 2019/20.

–          All dividend income has a tax-free threshold of £2,000, regardless of your other income

–          Any unused personal allowance (£12,500) can also be used against dividends

–          Dividend income above this, within your basic rate allowance, is taxed at 7.5%

–          Any dividend income in your higher rate allowance is taxed at 32.5%

–          If you earn over £150,000, additional dividends are taxed at 38.1%

Additional FAQs

Do I need to be outside IR35 to take dividends? In most cases, yes – if you are within IR35, 95% of your contract income is treated as salary and you make a ‘deemed salary’ payment instead. There is usually little or no profit left to declare a dividend. Our IR35 guide has further information on the legislation and ‘deemed salary’ payments.

What happens if there are multiple shareholders? All shareholders must receive dividends at the same time, with the proportion of dividend dependent on their percentage shareholding – no matter who did the work. Be careful when going into partnership – this can cause disagreements!

Will dividends lower the company Corporation Tax? No – dividends are a distribution of profits, after Corporation Tax has been accounted for.

Can I take dividends from future or expected profits? No – you must have profit available in the company to pay a dividend.

We hope you found this guide useful. For further information on dividends, please call us on 01442 795 100 or email sophie.lewis@dolanaccountancy.com.