Getting dividends right for your limited company
Updated: Feb 4
Dividends are one way to take money out of your limited company, but how do you do this and what are the rules?
Broadly speaking these are the main ways an owner/manager of a limited company can permanently take money out:
Salary, expenses and benefits
Quite often you will want to use a combination of the two to minimise your overall tax burden. An accountant can help you calculate the most appropriate combination for you.
So what are Dividends?
A dividend is a payment a company makes to its shareholders out of it's profits. This means:
The company can declare any amount of dividend as long as there are sufficient profits to cover it
A dividend made in excess of available profit is an 'illegal dividend'. A director declaring and making a dividend in these circumstances is in breach of their duties.
If the company has more than one shareholder, the dividend declared is payable to all shareholders in proportion to their holding (so two 50% shareholders will each receive 50% of the dividend declared). [Note: this assumes the company has a single class of share capital with all shares having equal rights to dividends. If in doubt consult you articles of association and shareholder register]
The company does not pay tax on dividend payments
To pay a dividend:
You must hold a directors meeting to 'declare the dividend'
Record the decision in the minutes
Write up a dividend voucher showing the date, company name, names of the shareholders being paid a dividend and the amount of the dividend
Give a copy of the dividend voucher to each shareholder recipient and keep a copy for the company's records
Tax on receiving a dividend
Shareholders receiving a dividend may have to pay income tax on it. Dividends from companies (outside of an ISA arranagement) are taxed on individuals as follows:
The first £2,000 is currently tax free as this is covered by a 'dividend allowance', then
at 7.5% (increasing to 8.75% from 6th April 2022) for ordinary rate taxpayers (after deducting any available personal allowance)
at 32.5% (increasing to 33.75% from 6th April 2022) for upper rate taxpayers
and at 38.1% (increasing to 39.35% from 6th April 2022) for additional rate taxpayers
If your total amount of personal dividend income is less than £2,000 you don't have to tell HMRC about it
Before deciding to make a dividend it is crucial you know how much profit is available in the company to distribute.
You should also consider taking salary and/or benefits and an accountant can help you decide the best mix for you.
The information contained within in this article is provided for informational purposes only and is not intended to substitute for obtaining accounting, tax, or financial advice specific to your own circumstances from your own adviser.