Have you just become a Director or perhaps your business has discussed with you offering you shares? Or you might be setting up your own limited company. In this article we look at what you should do if you own shares in a company, how dividends work and the taxes that are applied to them.
Back to NEWSWhen a company is formed, it must have at least one share (but there isn’t a maximum). The shares can be a number of different types, called classes. These classes will determine various things like the rights the shareholder has, if they can vote at meetings and how much their dividend might be worth. While dividends can be paid at any time, it’s normally decided at the end of each financial year. The board of directors of a company will decide how much of that year’s profits will be directed towards dividend payments. Any shareholders who have the right to dividend payments will then be paid.
With public limited companies, dividends aren’t linked to the value of the share, and the share price can go up or down independently of the dividend payments. However, shares that normally yield good dividend payments are more likely to be popular. It’s perfectly normal for a company to use shares as a part of a remunerations package for both directors and staff. It’s also normal for smaller companies to use dividends to distribute some of the profits to directors or staff in a company. If you receive money from dividends, you need to account for this in your self-assessment tax returns, since it won’t have tax automatically deducted.
Dividend rates are based on your income tax rate, for the coming 22/23 tax year, these will be:
| Income Tax Band | Dividend tax rate | Income tax rate |
| Basic rate | 8.75% | 20% |
| Higher rate | 33.75% | 40% |
| Additional rate | 39.35% | 45% |
There are a couple of things to note:
We’ve got a guide on investment planning that could help you
The first thing to know is that your taxes are ‘stacked’. Your income from work and pensions and property is placed first, then your capital gains, then savings income and then lastly your dividend income.
This means that dividend income, rather than salary income, will be taxed at the higher rates if you straddle two bands. As tax on dividends is lower than income tax at the same band, that can sometimes allow you to be more tax-efficient.
If someone had a salary of £45,000 and an additional £9,000 was paid from dividends, your calculations would look like this:
Employment income, counted first,
Dividend income, counted last,
Of course, your own personal situation may be full of factors that will influence your tax bill and so it’s important to be totally clear on the whole picture of your finances. We’ve got a tax guide that you may find helpful.
If you earn less than £2000 in dividends, you don’t need to do anything, since you’re under the personal allowance.
From £2000 to £10,000 there are a few options, depending on your circumstances. Firstly, you must inform HMRC. They can then take the money from your tax code or your salary or pension. Lastly, they may suggest a self-assessment tax form, if you’re not already doing one.
If it’s over £10,000, you must fill out a self-assessment form. While they seem simple at first glance, dividends can actually be a complicated asset to build into a strategy. Getting an understanding of your whole unique financial planning picture, including income, savings, investments as well as other assets, allows you to build a plan that will work well for your individual circumstances. These are the types of plans that Unividual specialise in creating for our clients.
The value of investments and the income they produce can fall as well as rise, you may get back less than you invested.
Tax treatment varies according to individual circumstance and is subject to change.
