There are a few things below to consider when deciding how much dividends to pay. Generally speaking, you should pay yourself as much dividends as possible at the lower rates of tax. However, you may want to pay yourself a small salary first, because this will save corporation tax.
Does the company have enough profit reserves?
A dividend is the payment of company profits to its shareholders. So a company can only pay a dividend if it has enough profit to cover that dividend. A company may have unused profits (or even losses) from previous years, so you need to look at total profit reserves (or retained earnings) rather than just the profit of the current year. Profit reserves are the net profits after tax of a company since it started, minus the total dividends paid since it started. You can find the amount available on an up to date balance sheet report. It will be the Total Equity minus Shares, or called the Profit & Loss Account, or Retained Earnings.
Are there any other shareholders?
Dividends have to be paid at the same rate per share to all shareholders of the same class. If the company has a simple share structure, we can say that dividends need to be paid out in the same proportion as how the company is owned. So if two shareholders each own 50% of the company, a total dividend will need to be shared 50% each. The company will need to have enough profit reserves to cover the total dividend.
How much tax will I pay?
Dividend don’t affect corporation tax, only personal income tax. Every person can receive £2,000 of dividends per tax year, tax-free. This is in addition to your tax-free personal allowance of £12,570 per tax year. So if you have no other income, you could receive £14,570 of dividends tax-free. Otherwise, dividends that fall above these allowances, and below your total income of £50,270 will be taxed at 8.75%. Dividends that fall into your total income over £50,270 taxed at at least 33.75%. These rates and allowances are correct at the time of writing (2022-23).FAQs