Limited Company Dividends
So what are Limited Company Dividends and how should contractors take them?
To maximise the amount of money that contractors can keep, they should take as much of their income as possible in dividends.
At the same time they should keep their director’s salary as low as possible.
With dividends you don’t have to pay National Insurance.
Limited Company Contractors Take Low Salary
If limited company contractors pay themselves a low salary they can avoid paying tax at the higher rates of income tax.
So there should be a good split between taking ones money in salary and limited company dividends.
You want to make your company as tax efficient as possible.
Calculating a Limited Company’s Dividend Payments
Before your limited company can pay you a dividend you must first work out what your profit is.
From you income you can deduct any tax deductible expenses.
That will include your accountancy fees.
You can include any income tax that you will pay.
You should also deduct corporation tax.
Then you have the amount available to pay as dividends.
Creating a Dividend Voucher for Your Company
You then have to create a dividend voucher with the details of the company, shareholders and amount on it.
For most contractors they will be the sole shareholders in their companies.
All the limited company dividends will accrue to that freelancer.
Once you have created the dividend voucher you can then pay the dividend.
Dividend Tax Free Allowance
You get your first £5,000 of your limited company dividends free of tax. This will reduce to £2,000 in the tax year to April 2019.
You also have your personal allowance of £11,850 which is free of tax.
After that you have to pay tax at 7.5% for the taxpayers who pay tax at the basic rate and 32.5% for higher rate taxpayers.
So, if you can take your total of £16,850 allowances tax free and then pay tax at 7.5% you are quids in. Again this will reduce to £13,850 in the tax year to April 2019.
One thing to remember, though, is that your limited company dividends payments can not be higher than your profits.
HMRC wouldn’t like that.
When to Make Dividend Payments
You can take dividends whenever you like but most accountants advise having a regular dividend schedule.
For each dividend payment you must create company board minutes.
Make Sure you do that.
Stay Outside IR35 if Making Dividend Payments
If you are taking most of your money in limited company dividends just make sure that you are outside IR35.
If HMRC decide that you are inside IR35 that will be more money that you will have to pay out in back taxes.
The good news for you is that your accountant will be able to do most of this for you.
Your accountant will know the most efficient way for you to pay yourself to maximise your financial returns.
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