Dividends are paid to shareholders in proportion to their shareholding, as a distribution of profits after all expenses (including salaries) have been paid for the year, and after paying Corporation Tax. NI contributions are not due on dividend payments.
If you are working on an assignment that comes under IR35, it is unlikely that you will be in a position to pay dividends out of that income.
If you are working on an assignment that does not come under IR35, you may be able to pay dividends, but HMRC advise that you should pay yourself a reasonable salary for the work that you do through your company before paying dividends. Certainly, once you have paid salary up to the NI threshold, it is marginally more efficient to pay dividends rather than further salary. (See the section below about taxation of dividends.)
If you think you will wish to pay dividends, you should give careful consideration when you set up the company as to who the shareholders will be, what proportion of the shares they will have and how much in total you might pay as dividends during the year. (See the section below about ‘income shifting’.)
HMRC would normally expect your earned income (including any pension that you may be taking) to cover your living expenses and would not expect you to be living entirely on dividends paid to you from your company. Certainly, you should not be paying dividends on a monthly basis, as HMRC may then wish assess this income as if it was salary. It would in fact be unconventional to pay dividends more than twice a year, and to pay much more often might attract attention from HMRC.
Three issues might affect the level of salary that you choose to pay before paying dividends:
- You will not achieve the maximum state pension unless you have paid NI up to the earnings threshold for a required number of qualifying years. This may not seem important now, but may be a welcome addition later on.
- Some lenders base their calculations exclusively on salary and will not take dividends into account as part of your total earnings when considering the maximum amount that they are prepared to lend.
- A consistently low salary may affect how you are able to use any pension pot that you build up while working through your own company.
Paying a spouse or partner dividends
HMRC require the total of any payments to your spouse or partner for work you have done, to be in reasonable proportion to the total of your own income.
You can risk an investigation by HMRC if you transfer income to a spouse or partner in the form of dividends.