A guide to contractor dividends

When you start contracting, you’ll hear your accountant mention paying yourself through dividends. To give you a broader understanding of dividends and how they affect you, we have constructed this plain English guide to contractor dividends.

Our qualified accountants are experts in contractor accountancy and they will be able to answer any questions that you have about dividends and taxation in general. To find out more, call our friendly team on 020 7481 4743.

What are dividends?

In a nutshell, dividends are an alternative way of paying yourself through your company and any profits it has made. They are paid to shareholders of the company after tax, so as a shareholder in your limited company, you can be paid via dividends. However if you had employees on your books, they would not be able to be paid via dividends as they don’t have a shareholding in the company.

Many contractors will pay themselves a regular salary from their company and this is susceptible to bother employers and employees national insurance. However, the remaining profits in the company can be paid via dividends, which do not attract national insurance of any kind.

One of the key benefits of trading through a limited company is the tax planning opportunities that come along with it. Therefore, there is no obligation to take all of the profits out of the company at once – you can save these to take as a salary in a month when business might be a bit quieter.

What to do if you have two or more shareholders

It isn’t uncommon for contractors to have two or more shareholders within their company, usually this is due to either a family partnership or two contractors working together.

All shareholders will receive their dividends at the same time, so if you are in a partnership with another company and you both own 50% of the company, you will each receive 50% of whatever dividend is taken. Sometimes this can cause an issue if one contractor has taken on a heavier workload than the other, so be sure to establish your roles and responsibilities early on to avoid such issues arising.

Can dividends only be taken once a year?

A common misconception of dividends is that they can only be taken once a year, whilst this can be the case for larger corporations, as a contractor working through a limited company, they can be paid to you whenever there is profit in the business.

Paying tax on dividends

Whilst dividends aren’t subject to national insurance, they are subject to tax. It’s best to speak with your accountant to establish how much tax you could pay on your dividends as sometimes it can get a little complex when you take your individual personal allowances into consideration.

How does IR35 impact on dividends?

Firstly, if you aren’t sure what IR35 is, we have written a comprehensive, yet jargon free guide to help break everything down. Make sure you have a read of it because it is an important piece of legislation that cannot be ignored.

So just how does IR35 affect dividends? Well, in order for you to take dividends out of a limited company, your contract needs to fall outside of IR35. If your contract falls inside IR35 you will only be able to take profits out of the company as a salary.

We can arrange a comprehensive IR35 check of your contract, all you need to do is contact our experts and they will be able to talk you through the process. Even if you think your contract is outside of IR35, it is worth getting it checked for peace of mind, and the last thing you want is to be issued with any penalties and a hefty tax bill down the line.

What are dividend vouchers?

Dividend vouchers are a way of recording when a dividend is taken out of a company. They will contain information such as the date the dividend was taken, how much was taken and who it was paid to. Don’t worry though, our expert accountants will ensure that you have a dividend voucher and that it is completed correctly.

That’s dividends covered! We have a wealth of other useful resources that you may benefit from, so be sure to visit our comprehensive resources section to read guides like: