What are dividends and why are they important?

By paying yourself in the form of dividends you can keep your tax and National Insurance bills to a minimum.

Once your employees’ salary levels exceed approximately £10,000, it will attract between 20% and 45% tax. There is also Employees’ National Insurance at 12% and Employers’ National Insurance which is currently 13.8%.

Company profits, however, are subject to very different tax rules and the current tax rate is 20%. Once the tax is calculated on the profits the remainder can be paid as dividends to the shareholders. So overall, the tax payments on dividends are significantly lower than those taxes related to a salary.

It is important to keep in mind that dividends are still treated as income for individuals though. This means that if the total income (salary + dividends + any other income) exceeds the basic rate tax threshold, then additional higher rate tax will be payable. This is calculated at the end of each tax year via the self assessment tax return and is paid by the individual personally.

For further information on dividends and their taxation, take a look at our guide on dividend tax credits.