What is a fiscal year?

The fiscal year starts on April 6th every year, ending on April 5th the following year. For example, the current fiscal year (2021-2022) started on April 6th 2021 and will last until April 5th 2022. 

But why is that important?

Well, the fiscal year is an important time scale for limited companies and their shareholders, regarding dividends. So let’s take a closer look at dividends. 

Specifically, we’ll be answering these questions:

• What are dividends?
• Who pays dividends?
• Why are dividends paid?
• How often are dividends paid?
• How much is dividend tax?

Dividends are regular payments made to a company’s shareholders. They allow shareholders to make money from their investment without having to sell their shares. 

The payments are taken as a portion of the company’s profits, so they can only be paid by companies that actually make a profit. 

The amount that’s paid depends on how much stock the shareholder owns, and the dividend rate set by the company owners. For example, if the dividend is 90p per year, and you own 100 shares, you’d get £90 in dividend payments at the end of the fiscal year. 

The price of the company’s shares on the stock market don’t necessarily affect dividend payments, it’s just an amount decided by the company owners. However, usually the dividend amount will increase when profits increase, as a good business gesture. 

Because dividends are paid to shareholders, only companies who have shareholders need to pay dividends. It only applies to certain kinds of limited companies.

There are 2 basic structures of limited companies:

• Private limited companies (ltds) – The most common set up for small businesses in the UK, private limited companies can’t publicly sell or trade shares in their company.
• Public limited companies (PLCs) – More often larger businesses, public limited companies can raise money by selling shares to the public on the stock exchange. 

On top of those 2 kinds, there are 2 different ways to set up your limited company. It might be limited by shares or limited by guarantee.

Limited by shares companies try to make a profit for the owners, meaning they need to pay corporation tax. 

A limited by shares company:

• Is legally separate from the people who run it.
• Has separate finances from your personal ones.
• Has shares and shareholders.
• Can keep any profits it makes after paying tax.

Limited guarantee companies are normally ‘non-profit’, meaning they don’t have to pay corporation tax, like charity organisations. 

A limited guarantee company:

• Is legally separate from the people who run it.
• Has separate finances from your personal ones.
• Has guarantors and a ‘guaranteed amount’.
• Invests profits it makes back into the company.

But what does this all mean for dividends?

Basically, the only companies that have to worry about dividends are public limited companies that are limited by shares. 

Technically, even a public limited company doesn’t have to pay anybody dividends, but it probably won’t go down well if they don’t. 

Dividends are paid to shareholders as a reward for their investment, as an incentive to stay invested in the company, and to attract new investors to buy shares. It inspires confidence as a sign of healthy profits. 

As the business owner, you’re also allowed to give yourself dividend payments. 

There are no hard rules on when dividends have to be paid, it’s very much up to the business owners. But most business owners pay dividends annually, and on an interim basis. 

An interim basis could be every month, quarter, or 6 months. In general, quarterly dividend payments (every 3 months) are pretty common. 

Quarterly reviews are generally a good time for businesses to track their progress, pay dividends, and send financial reports to their shareholders. 

You can receive up to £2,000 per year in dividend payments before having to pay any tax on them. Any more than that and you’ll have to pay dividend tax. 

The amount you’ll be taxed depends on what income tax rate you pay. 

• If you pay a basic rate of income tax, then you’ll pay 7.5% tax on your dividends.
• If you pay a higher rate of income tax, then you’ll pay 32.5% tax on your dividends.
• If you pay an additional rate of income tax, then you’ll pay 38.1% tax on your dividends. 

It’s worth noting that dividends count toward your total income but are taxed separately and at a different rate. It can be a little confusing, so let’s look at an example. 

In one fiscal year you could get £4,000 in dividends and £30,570 in wages, giving you a total income of £34,570. This would put you in the basic tax band. 

For income tax, you have a personal allowance of £12,570. So you’d deduct the personal allowance (£12,570) from your total income (£30,570) to get your taxable income (£18,000). 

That £18,000 is made up of £14,000 in wages and £4,000 in dividends. Because you’re in the basic tax band, you’d pay:

• 20% tax on your taxable wages (£14,000) – £2800
• 0% tax on the first £2,000 of dividends – £0
• 7.5% on the other £2,000 of dividends – £150

Add this all together and you’ll end up paying £2950 in income tax at the end of the fiscal year. 

The Countingup business current account makes it easy to manage all your financial data in one simple app. The app comes with free built-in accounting software that automates the time-consuming aspects of bookkeeping and taxes. 

You’ll receive real-time insights into your cash flow, profit and loss reports, tax estimates, and the ability to create invoices in seconds. 

You can also share your bookkeeping with your accountant instantly without worrying about duplication errors, data lags or inaccuracies. Seamless, simple, and straightforward.

Find out more here.