how much dividend can i pay myself tax free

When Can You Pay Yourself Dividends As A Contractor

06/04/2021Accountants for Contractors , Dividend Allowance

If you’re a limited company owner, you can use two ways to pay yourself. The first way is through the salary and the second is through dividends. Most people prefer to pay themselves through dividends as it is one the most tax-efficient ways to pay yourself. In this blog, we’ll explore how much dividend can I pay myself tax-free as a contractor.

You might be looking for:

How do dividends work in the UK

Timing dividends right could help save tax

How Can a Self Employed Personnel Benefit From Dividend Allowance 

But before that, you should first know what are dividends!


Basics of Dividends:

Dividends are the profit made by a company that is paid to the shareholders after deducting the expenses of the business i.e tax etc. In other words, they are one of the simplest ways to pay yourself without losing much money on taxes.

You can get a dividend allowance of £2,000 for 2021/22 that is tax-free along with your personal allowance. The shareholders of limited company pay themselves salary to minimise Income Tax and National Insurance liabilities. Besides, the amount they receive as dividends is exempted from National Insurance and they can avail more tax reductions on their gross income.


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How Much dividend Can I pay Myself Tax-free?

Like we have just discussed, you are exempted to pay National Insurance Contributions for the income you received as dividends. Yet, you need to pay income tax on the money you receive as dividends.

But, you might be still wondering: how much dividend can I pay myself tax-free. For that, you can avail annual dividend allowance of £2,000 that is totally tax-free.

However, if you are a basic rate taxpayer earning below £50,000, you need to pay 7.5% of the income tax including the dividend payment. For higher rate taxpayers (earning more than £50,000 up to £150,000)  the rate of income tax is 32.5%. If you’re additional rate taxpayers (earning above £150,000 as income), you are obliged to pay 38.1% of the income tax.

After doing calculations, you personally pay your income tax at the end of the year through your self-assessment tax return.

You should remember that whether it’s a dividend, salary, or any other income, it will be considered your gross income. You are liable to pay income tax on it at the above-mentioned rates. Let’s make it easier for you through this formula:

Income = Salary + Dividends + Any other income

Struggling to legally minimise your income tax liabilities, CruseBurke will do it!


Quick Wrap Up:

Hopefully, you have got a reliable answer to how much dividend can I pay myself tax-free. As most contractors say that the best way to withdraw money from a limited company is to pay yourself through a small salary and dividends. Though it varies as per your situation, yet it’s worth investing to combine both to get the optimal tax advantage.


Need professional help from an accountant, we’d love to hear your queries.

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Disclaimer: This blog provides general information on paying dividends as a contractor.

Related post

how do dividends work
How Do Dividends Work in the UK

01/04/2021Dividend Allowance

Are you looking forward to buying shares of a profitable company in the UK? Are you still wondering if this is a good time to start out? If you’ve already started out. Great job. The amount you’ll earn as a profit is known as a dividend. If you are looking for an accountant to reduce your taxes on dividends, reach out to us! Struggling to find more about dividends and how to use them? Let’s dig into the details of dividends a bit further:   What are Dividends? Let’s say Ann bought shares of a company. The company earns a lot of profit, and Ann gets her due profit. The term specifically used for the profit Ann makes once she’s bought the shares of a particular company are called dividends. Any will get her due share once she’s paid her liabilities, business expenses, and other due taxes. These might include VAT and corporation taxes too. It’s important to note that people don’t rely on dividends as a sole source of income. It’s normally classified as a source of passive income. Basically, you get to choose. When would you like to have them? Whether you’d like to have them on a monthly or quarterly basis.   How Do Dividends Work in the UK? In the UK, every other company has its own rules of payments, payment timings, and dividends. It’s important to note that companies pay dividends on their profits. It is important to note that there are different reasons for any company to onboard shareholders. Many companies want to have a long-term relationship with their customers. So they make that an integral part of their marketing strategy and propose them to buy shares. If you’re living in the UK, you must understand that it’s compulsory for all individuals/companies to pay their taxes. So the amount you get from your dividends does not include taxes. Taxes have been deducted from those. Curious to know how dividends are issued? Let’s find that out together:   How Dividends are Issued: As a business owner, it’s really important for you to understand how dividends are issued. The process is simple and easy as described below: You must understand whether your company is making profits or not. Well, that’s really simple. All you’ve got to do is check the record of your balance sheet, and profit and loss statements. If you’re not making profits, you shouldn’t announce dividends. Once you’ve ensured that the company is making profits, you need to get all the directors on board to finalize whether the dividends must be paid or not. Also, make sure to prepare tax vouchers for the shareholders. You must also ensure that you update and record your accounts in time.   Quick Sum Up: Dividends not only help you secure taxes as an owner but also as a shareholder of a limited company.  We hope we’ve helped you quickly summarize ‘how do dividends work in the UK’. Want a person to secure taxes, our chartered accountants are here to help. Contact us today! Disclaimer: Remember, on every investment, there lies a risk factor. This blog is just for general information.

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