If you’re the owner of a limited company, navigating the world of dividends can feel fraught with confusion and wrong turns. How much should you take? When should you take it? And how do you know if you’ve done it correctly? As with most things, it helps to have a plan.

How dividends work

The most basic but most important thing to remember is that when you’re operating as a limited company, its earnings are separate from yours. Its bank account is different, and legally it’s another entity altogether. Even if you’re the sole shareholder of that company – and the one with access to its money – there are still set ways and means of getting your hands on it.

With apologies to those who already know, let’s pause for a brief explanation of what dividends actually are. When a limited company earns money, it first has to pay all of its expenses, before paying tax on what is left (its profits). This corporate tax is at a much lower rate than a sole trader profit (for higher-rate taxpayers).

What is left over after this tax is its “distributable profits”. These are profits that are now available for distribution among the company shareholders. However, these profits continue to belong to the company, until it agrees to share them.

This is where dividends come in. Declaring a dividend is how you declare your intention to draw money from the company’s account and place it in your personal one. As a shareholder, you’re entitled to do this, but you have to do it in a certain way, in real time. This includes holding a meeting with minutes and writing up a dated dividend voucher.

Why dividends are a good thing

Declaring a dividend might feel like just another piece of unnecessary paperwork (especially if you’re a sole owner), but it’s a useful way to keep yourself on track. If the flow of cash from your company to your personal account isn’t planned and controlled, it can become all-too easy to inadvertently take too much. And, if you don’t officially take money as a dividend, it can’t count as one.

Instead, non-declared money taken counts as a loan from the company, which can leave the “lender” facing a bill for extra tax. Even if the extra money is all taken correctly, as dividends, spending over the £50,000 mark will make you liable to pay more personal tax on it.

That’s why, to get the most out of dividends, it’s best to plan ahead.

Planning dividends for your personal finances

When we first begin working with clients, and at the start of each new tax year, we dedicate time to creating a bespoke tax plan. This encompasses your personal finances as well as your company’s, meaning we can consider how much money you need to support your lifestyle, and how we can balance that with your likely profits. This allows us to set out, in advance, the dividends that you’ll take. At this point, we can also look back at the year just gone to see if anything deviated from the plan, and why.

We can then work with you to think ahead for next year. This way, you have the security of knowing what’s likely to be coming in, knowing you’re getting the most from your money in tax savings and allowances, and knowing that there won’t be any nasty surprises when it comes to your company tax bill.

Having a plan, and checking in with it regularly, can help to avoid any underspending, as well as any overspending. At 8.75%, the tax rate on dividends up to £50,000 is the lowest you’ll find, meaning it’s sensible to declare up to this amount, if profits allow, each year. With just under a month to go until the end of the financial year, this is a good point in time to check the value of your dividends so far and take any more that you’re entitled to.

If you’d like to find out more about personal tax planning, or feel you’d benefit from a personal budget review, get in touch with our team.