As we approach the end of the tax year, we thought it would help write an article explaining how dividends are distributed within a Limited company. If you have recently set up a limited company, it will be helpful for you to understand the process thoroughly.
For Limited companies that have been operating for a while, it's worth checking the process and taking into account factors that may affect your dividend payment due to the pandemic.
Businesses operating as Limited Companies have shareholders that are all entitled to a share of the profits. Dividends are often the most tax-efficient way of paying shareholders. These are payments that are made after the company has paid all businesses expenses and liabilities. This includes payment of corporation tax and VAT.
Often company directors will pay themselves a small salary each month. Then at the end of the year, a review of the profits is made, and if there is more than one shareholder, a meeting should take place to 'declare' the dividend. If you are a sole director, you need to complete the correct paperwork giving the dividend's date and the amount issued. Your accountant should be able to advise on the best process for your company.
The distribution of dividends to the shareholders is based on the percentage of share ownership. For example, if there are three company directors and all have an equal share of the company, they will receive an equal share of the dividends.
The first £2,000 of dividends is chargeable to tax at 0% (the Dividend Allowance). Dividends received above the allowance are taxed at the following rates:
Dividends within the allowance still count towards an individual’s basic or higher rate band and so may affect the rate of tax paid on dividends above the Dividend Allowance.
To determine which tax band dividends fall into, dividends are treated as the last type of income to be taxed.
Dividends are unlawful when insufficient profits exist within the company to cover the amounts paid. Rules regarding the payment of dividends are laid down in the Companies Act, 2006, which states, "a dividend or distribution to shareholders may only be made out of profits available for the purpose."
The pandemic has resulted in many businesses changing how they operate and has had a significant impact on their finances. If your financial situation over the past year has been very different from previous years, then you must take make adjustments if any of these apply to you:
If these adjustments are not considered, you could be at risk of making illegal payments to your shareholders.
If you are unsure about the dividend level you can pay your shareholders as we approach year-end, please do contact us. We will advise you and ensure that all financial adjustments are made according to your business circumstances.
You can call 01623 490 120 or email This email address is being protected from spambots. You need JavaScript enabled to view it..
Haidee is our Personal Tax Director and is a fully qualified tax adviser, having achieved the ATT qualification in 2006. Tax efficiency being her main concern. Specialising in taxation, Haidee provides clients with advice on personal tax, PAYE services, VAT and social security. She also provides guidance to new start-up businesses.
Call us today on01623 490120
or email info@watsonk.co.uk
When you first start a business, your focus is usually on attracting customers, generating sales and building a successful company. Few business owners spend much time thinking about how or when they will eventually leave the business.
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