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.

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How do dividends work in the UK

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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

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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.

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