In order to legally pay a dividend the company director(s) need to go through the following procedures:
- They need to determine whether the company has sufficient retained profits to cover the dividend at the date of payment. Basically, enough assets (e.g. outstanding sales, money in the bank) should be left in the company to pay for it's liabilities (e.g. corporation tax, VAT, PAYE/CIS, suppliers).
- They must hold a board meeting and keep the minutes of the meeting. Here is an example of the board meeting minutes.
- They must issue dividend vouchers to all shareholders. Here is an example of a dividend voucher template.
IMPORTANT: This guide shows you how to legally pay a dividend. Please be aware that there may be further personal taxes due on the dividends taken - see the current (2017/18) personal tax rates at the bottom of this guide.
Dividends or distribution to shareholders may only be made out of company profits. The directors are required to have sufficient information available in order to enable them to make a reasonable judgement as to whether the amount of the distributable profits at the date of payment is acceptable.
Any dividend paid in excess of this profit, or out of capital, or when losses are made, is illegal.
In the board meeting you need to determine the company's distributable profits. You need to find the following figures to get this:
1. The retained earnings figure is shown on your prior year accounts - you can find the figure online at Companies House. To do this - type in your company name, click on filing history, select your most recent accounts, find the balance sheet page and under 'capital and reserves' you will find the retained earnings figure. If it's your first year trading as a limited company, there will be no figure for retained earnings.
2. The profit figure is the profit made since your prior year accounts. So for example, if your prior year accounts were dated 31 March 2000, you will need to calculate your profit from the day after - 1 April 2000 onwards. This figure should include anything that's non tax deductible too - such as dividends, entertaining & fines/penalties. Bookkeeping software makes this process a lot easier as you can use a report called 'profit and loss'.
3. The corporation tax liability is the tax due on your profits since your prior year accounts. To get this you will need to add any expenses that aren't tax deductible (dividends, entertaining & fines/penalties) to your profit figure. You then multiply the profit figure by the corporation tax rate.
The distributable profits are equal to retained earnings plus profit minus corporation tax liability. This will give you a rough guideline as to how much you can distribute as a dividend.
Once the distributable profits have been determined, the director(s) must keep the minutes of the meeting declaring the total dividend paid. Here is an example of the board meeting minutes.
For each dividend a company issues, a voucher must be created and given to its shareholder. This voucher provides the following details about the dividend:
- Name of company
- Company registration number
- Date of issue
- Name and address of shareholder receiving the dividend
- Share class
- Amount of the dividend payment
- Signature of authorising officer
Here is an example of a dividend voucher template.
For the 2018/19 tax year, taxpayers are required to pay tax on dividends above £2,000 for any given tax year (i.e. 6 April - 5 April). The following rates apply:
- Basic rate taxpayer – 7.5%
- Higher rate taxpayer – 32.5%
- Additional rate taxpayer – 38.1%