Dividend Guide for Limited Company Contractors

If you run your own Contractor Limited Company and the contracts you are working further to are considered to be ‘Outside IR35’ you can take income from the Company in the form of tax efficient Dividends.

By taking contract billings in the form of Dividends you can save large amounts of National Insurance and boost net retention significantly.

Are you a professional Contractor? Are you interested in going into business with your own Contractor Limited Company? If so Commonwealth Contractors can help!

At Commonwealth Contractors we work with Chartered Accountant Partners who can help you to go into business with your own Contractor Limited Company and maximise contract earnings.

To discuss your situation with an experienced advisor call Commonwealth Contractors now on 0800 294 4388 or Submit your Details and we will get right back to you!

Dividend Tax

If a Limited Company makes a profit it can distribute the profit to shareholders in the form of a Dividend. Before a Dividend can be paid however the Limited Company must pay (or provision for) Corporation Tax on the value of the Dividend.

The Corporation Tax liability is calculated and paid to the HM Revenue and Customs at the end of the financial year and takes into account the overall profit made by the company in the period and the actual dividend distribution made to shareholders.

For more information on Corporation Tax please see our Corporation Tax Guide for Limited Company Contractors.

Individuals who receive Dividends may have to pay higher rate and additional rate Income tax on the value of the dividends further to an end of year self assessment tax return.

The following table shows Dividend Tax rates for the 2015 / 2016 tax year;

Dividend Tax Rate

Thresholds in 2014-15

Thresholds in 2015-16

Starting rate limit
(savings income)

0%
(was 10% in 2014-15)
£2,880 £5,000

Basic Rate

10% Up to £31,865 Up to £31,765

Higher Rate

32.5% £31,865 to £150,000 £31,765 to £150,000

Additional Rate

37.5% £150,000+ £150,000+

Please note that the basic rate tax band is cancelled out by the 10% tax credit that you receive on Dividend Income. Therefore if your 2015-16 deemed dividend income earnings are;

  • Less than £31,865 – you would not pay any further Income Tax
  • More than £31,866 (but less than £150,000) then you would have an effective rate of 22.5% as the 32.5% Higher Rate Tax percentage would be reduced by the 10% Tax Credit. In practise as you are also paying tax on the tax credit, the ‘extra pay’ is 25%. See The Compound Effect of Corporation Tax & Personal Income Tax

Dividend Payment

It is very important to ensure that any Dividends taken through your Contractor Limited Company are legal.

If you fail to follow proper dividend payment procedures you could find that at an audit the HM Revenue and Customs deems the payments invalid and forces you to pay employment taxes on the value of the dividend (i.e. Employees and Employers National Insurance).

The basic process is;

  1. Profits Generated: You must make a profit in order to take a Dividend
  2. Meeting Called: Dividends approved by the board. Company Minutes updated
  3. Dividend Voucher Generated: Please see below for details
  4. Payment made & Dividend Voucher Issued

Company Board Minutes

In order for a Dividend to be paid the board of Directors must update the board minutes to state the;

  • Company Name & Address
  • Year end date
  • Date on which the meeting was held
  • Date the dividend was paid
  • Total dividend paid to shareholders

Dividend Voucher

Dividend Vouchers are given to Limited Company shareholders once a dividend payment is made. The Dividend Voucher informs the shareholder of the net dividend paid and tax credit.

The Dividend Vouchers should state the:

  • Company Name & Address
  • Names of shareholders being paid a dividend
  • Dividend payment date
  • Amount of the dividend
  • The amount of Dividend Tax Credit

Find out More

To find out more about Commonwealth Contractors call now on 0800 294 4388 or Submit your Details and we will get right back to you!

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