Dividends - A Refresher of the Rules

Photo by Sharon McCutcheon on Unsplash

This is an area which can cause problems for owners of small limited companies.  With the arrival of the dividend tax it’s becoming increasingly important to document, declare and pay dividends correctly as the timing of these can influence your (and other shareholders’) tax bills.
I might have mentioned before but it really is unacceptable to simply take ‘drawings’ and hope it levels out at the year end!

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When You Can declare a Dividend

​A dividend is a ‘bonus’ - in working out what you can pay you must work out who you owe money to including suppliers, VAT, PAYE and Corporation Tax (including the tax you are likely to owe based on the profits made in the current financial year) and ensure that there are enough assets in the company to cover those debts.

How To declare a Dividend

​Company directors must hold a board meeting to officially ‘declare’ interim dividends. You must do this even if you are the only director and shareholder in the company.  It’s important to keep a minute.
To issue a final dividend, shareholders must grant their approval by passing an ordinary resolution at a general meeting, or in writing.  Again in small businesses this is often the same director / shareholder.

How to Pay

​It’s important that a separate transaction is paid to each shareholder to their own (preferably not a joint) bank account and the payment reference is clearly marked as a dividend.

How Much is Tax Free?

​For the current year, the first £5,000 is tax free then a minimum of 7.5% will be applied to dividends – more for higher rate tax payers.  In the last budget it was announced that this was being reduced to £2,000, but this was then deferred but it is expected to reappear in the autumn.