As a shareholder in a limited company there are several ways you can use the money in its accounts depending, of course, on how much there is. 
 
If you’re registered as an employer, you can pay salaries, expenses, and benefits and you can receive money that the company owes you. You can also pay dividends to shareholders and this is something that many business owners find confusing. 

Dividends 

A dividend is a payment the company can make to shareholders, provided it has made a profit. 
 
The first important point is that you can’t count dividends as business costs, so they aren’t offset against your Corporation Tax
 
The second important thing to know is that your company can’t pay out more in dividends than its available profits from current and previous financial years. If you did, this would be known as an ‘illegal’ dividend, and you could become personally responsible for your company’s liabilities. 
 
Dividends are usually paid after the end of your company’s financial year although the directors can decide to pay interim dividends at any time. Normally dividends are paid to all shareholders. 
 

What counts as profit 

There are non-cash items which can affect your profit, such as depreciation of capital assets. Before you can pay a dividend, your profit and loss account must show that there is enough profit available after tax, normally called a 'carried forward’ or ‘distributable' amount
 

How to pay dividends 

To pay a dividend, you must hold a directors’ meeting to ‘declare’ it and keep minutes of the meeting. You must do this even if you are the only director. 
 
For each dividend payment the company makes, you must provide a dividend voucher showing the date, company name, the names of the shareholders being paid a dividend, and the amount of the dividend. 
 
Everyone who receives a dividend must be given a copy of the voucher and you must keep a copy for your company’s records. 
 

Tax on dividends 

Your company won’t pay tax on dividends but shareholders might have to pay Income Tax if they receive over £2,000. 
 
The amount of tax paid above the dividend allowance depends on your Income Tax band
Tax band 
Tax rate on dividends over the £2,000 allowance 
Basic rate 
7.5% 
Higher rate 
32.5% 
Additional rate 
38.1% 
To work out your tax band, add your total dividend income to your other income. You might pay tax at more than one rate. 
 
Here’s an example: 
 
You received £3,000 in dividends and earn £29,570 in wages during the 2020 to 2021 tax year. 
 
Your total income is therefore £32,570. 
 
You have a Personal Allowance of £12,570 before you pay any tax, so you can deduct this amount, leaving taxable income of £20,000. 
 
This is within the basic rate tax band, so you would pay: 
20% tax on £17,000 of your salary 
no tax on £2,000 of dividends, because of the dividend allowance 
7.5% tax on £1,000 of dividends. 
 
If you would like some advice about paying dividends from your limited company or to know more about our company secretarial service, please get in touch. 
Tagged as: accounting, dividends, tax
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