A dividend is a way of paying shareholders part of a limited company’s profits. The dividend will be a set amount per share. So, for instance on a £5 dividend someone who owns 100 shares will get £500. Alternatively a £10,000 annual profit could be divided by the number of shares in a company to decide the dividend. Dividends are taxed at a relatively low rate and are therefore quite a tax efficient way to take money out of a limited company.
Where does the dividend come from?
Dividends come out of the profit of your company after tax. If the company is not making a profit you cannot pay yourself a dividend. Your company mustn’t pay out more in dividends than its available profits from current and previous financial years.
Will my dividend be taxed?
The tax on dividend payments is typically 10%, about half of the standard PAYE tax rate. However, if you take more than £34,370 in dividends the tax rate goes up to 32.5%. You will also need to declare your ‘dividend income’ on your Self Assessment tax return.
How much can I be paid in dividends?
Dividends can be as big as you like and paid as often as you like as long as they come out of the company’s net profit.
How do I pay myself a dividend?
The profits of a limited company belong to the limited company and you therefore have to go through some formal steps before you can legally take a share of the profits.
1. First of all you need to check that you can afford to take the dividend from your profits after you have paid all relevant taxes;
2. Once you have established the amount you can take there needs to be a meeting of the company’s directors to declare the dividend;
3. The details of this meeting need to be recorded in the official minutes. You still need to do this even if there is only 1 person in the company;
4. A dividend voucher needs to be completed. These need to be in the correct format. You can make your own dividend voucher but it needs to include the following:
Name of the company
Name of the shareholders being paid the dividend
Amount of the dividend
Amount of the dividend tax credit
5. You will also need to make a record of all of this in your company accounts so that you can track how much has been paid out of the company at the end of the year.
Why do I have to do all that if I’m the only shareholder?
The rules for limited companies are the same if there is 1 person involved or 100. Once you have done it a couple of times the procedure is fairly straightforward and if you have an accountant they will be able to help you with it. They will also be able to help you with dividend tax credits which can be used to offset the income tax due on the dividend.
If you need more help with dividends or with other methods of taking money out of a limited company you can contact us or give our Business Consultants a call on 01245 492777.