What Are Dividends

Dividends are payments made to shareholders in the company - they are a distribution of the profits a company has made after tax.

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Dividends are often the most tax efficient way of extracting money from your company. Generally most people will take a small salary and take the remaining remuneration in Dividends.

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What Tax Rates Apply To Dividends?

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Similar to the Personal Allowance, there is the Dividend Allowance! This allows you to earn up to £2,000 in dividends tax free. This is generally always worth taking at a minumum.

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Any further dividends will be taxed as follows

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Basic Rate - 7.5% raising to 8.25% in April 2022.

Higher Rate - 32.5% raising to 33.75% in April 2022

Additional Rate - 38.1% raising to 39.35% in April 2022.

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How Do I Issue A Dividend?

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A company must have distributable reserves to issue a profit (the company must have remaining profit from previous years + the current year in order to extract money out of the company) - basically ensuring the company does not cause itself financially difficulty by paying a dividend in cannot afford.

Good practice would be to draw up a set of accounts or a profit or loss account at a minimum to check that you have profits.

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REMEMBER to deduct corporation tax or provisions for any costs incurred but not paid for in working how much you can distribute from the company.

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A meeting should be held with the directors of the company to 'declare' the dividend.

A dividend voucher should be issued for each dividend payment as a official document.

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Step by Step on How To Issue A Dividend

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Step 1 - Confirm that the company has enough (retained) profits

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In order to issue a dividend a company must have enough retained profits available to cover the declared dividends. This may result in some dividends being reduced in order to issue the remainder dividend.

If you are in the first year of business, you will need to prepare accounts to support the proposed dividends.

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If the dividends declared is above the available profits this will make it a illegal dividend. This is unlawful and will be treated as a loan for tax purposes which can give rises to multiple and unexpected tax consequences in the most part.

It is very important that you take specialist advice from your accountant to ensure you can take the dividend correctly.

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Step 2 - Decide whether to declare an interim or final dividend

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It is always simpler to issue dividends on an interim basis compared to a final dividend however sometimes the Company's Association of Articles require the company to have an Annual General Meeting (AGM) to issue the final dividend.

Payment of the final dividend is optional when interim dividends have been paid up.

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Step 3 - Declare the Dividend

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When you declare a dividend, you will need to prepare minutes of the meeting from the directors meeting and sign them in your capacity as a director.

This acts as proof that the dividends were legally declared by the directors and date of the agreed dividend to be paid.

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Step 4 - Prepare the Dividend paperwork

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A dividend voucher should be produced which will state your name, the number of shares, the dividend payable per share and the date that the dividend is payable.

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The dividend voucher should be kept in order to support your Personal Tax Return Records.

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Step 5 - Pay the Dividend

For interim dividends, these can only be treated as paid when actually paid or credited into your financial accounts (as in a credit entry to your directors loan account) available for the shareholder to access.

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If no dividend entry is made until after the end of the year when the accounts are made up, then the dividend is not paid until after the year-end.

This can be very important especially when an interim dividend was issued in order to clear an overdrawn directors loan account.

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If you need any support in regards to Dividends or the steps/formatilites that need to be taken, please reach out to our support team at hello@saintfinancialgroup.co.uk or click here.

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