Will I pay tax personally on my Ltd company Dividends?

Clients often ask about dividends issued to the owner of a limited company and what rate of tax such dividends attract. This article has been written to illustrate the tax implications of paying yourself dividends from your limited company without going into too much detail the postion is as follows

  Let’s take the example of a company director paying himself a dividend from his limited company of £18,000 and this is the only income he has earned during the tax year.

  The dividend issued by the Limited Company will be £18,000 and this will be the total sum received by the company director. However, the dividend certificate will state £18,000 dividend plus £2,000 dividend tax credit, giving total dividend income of £20,000. Here the dividend tax credit is simply a notional value and is not paid to the company director and will not be paid to HMRC.

  The company director will not pay income tax on the dividend he has received above of £18,000 and the amount that should be stated on his Self-Assessment Tax Return is £20,000. In effect the 10% tax credit cancels out the tax due on the dividend at 10%.

In essence, if you are a basic rate tax payer (income up to £34,370 for the tax year 2012/13) then you will not pay any tax on dividends you issue to yourself from your limited company. If you are a higher rate tax payer then income tax will be due on the gross amount exceeding £34,370. (assuming a directors salary below or equal to the tax free allowance)

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