Limited company dividends are usually paid to shareholders who have invested in the company at the end of the financial year. These dividends are calculated by the company board members and are determined by the profits made by the limited company within the last financial year. Small limited companies usually pay dividends annually, whereas larger companies with bigger profits often opt to pay them twice per year. It is a rule of thumb that the higher amount of shares owned by shareholders, the greater the dividend will be.
Deductions which apply to dividends
Dividends are usually distributed to shareholders by mail as a dividend voucher. This is comparable to a wage slip as it itemises the tax deducted by the company. Limited company dividends are not liable to national insurance contributions (NICs) but do include tax liability. The good news is that the tax rate applicable on dividends is considerably less than the normal PAYE rates. Typical rates are stated below:
Income of less than £34,370
PAYE: 20% Dividend: 10%
Between £34,371 and £150,000
PAYE: 40% Dividend: 32.5%
£150,001 and above
PAYE : 50% Dividend: 42.5%
Other ways to pay dividends
If you operate a company share plan for your employees and others, you may wish to allow your shareholders to reinvest their dividends into dividend shares. There is a maximum amount allowable of £1,500 annually. If the shareholders keep their shares for three years, they become tax exempt. This allows shareholders who do not cash in their shares for three years to save a considerable amount on their tax outlay. Limited company dividends can be delivered via an electronic payment system. This is becoming more common these days, but shareholders should be consulted before this system of payment is implemented.
When investing in a limited company, shareholders can enjoy an excellent rate of interest. Also, if shareholders have significant share investment in a number of different companies, they will find their dividends are very financially beneficial indeed.