A step by step Dividend guide on how to pay and process for companies and their owners.
At a Glance:
- If you are a shareholder, your company may distribute its profits to you by way of a dividend.
- Paying a Dividend has to follow a proper legal process otherwise the dividend will be illegally paid. An illegal dividend is not a dividend and should be repaid to the company.
- You may only legally declare a dividend if your company has retained profits left, after tax.
- You should draw up accounts. A profit and loss account at the very least to check that you have profits.
- Don’t forget to deduct Corporation Tax or provisions for any costs incurred but not paid for in working out how much you may distribute from the company.
- Unless your Articles say otherwise, it is easiest to always pay a dividend as an ‘interim’ dividend.
- You need to hold a board meeting to approve the dividend, even if you are a sole director company.
- Retain your board resolution and board minute.
- Prepare a tax voucher.
- Pay yourself a dividend.
Dividends Step By Step Guide
Step 1: Confirm that the company has enough profits
- A company must have enough retained profits to cover all declared dividends, even if some dividends are to be waived.
- Once you have decided to pay a dividend, review the balance sheet of the last filed accounts of the company to make sure that they show enough retained profits. If they do not, then interim accounts can be used to justify paying a dividend as long as they are reasonably accurate and have taken into account adjustments for items such as accruals, stock, depreciation and bad debts.
- If you are in your first year and have no previously filed accounts, then you should prepare accounts to support the proposed dividend.
- If dividends are declared which exceed available profits they are unlawful and will be treated as a loan for tax purposes which could give rise to unintended tax consequences.
Step 2: Decide whether to declare an interim or a final dividend
- A number of interim dividends can be declared by directors during the year, whereas a final dividend must be declared by shareholders at an annual general meeting (AGM) held after the year-end.
- A company does not have to hold an AGM unless its articles require it to. The paperwork involved for interim dividends is more straightforward than for an AGM so in most cases it is simpler to always declare dividends on an interim basis.
- Payment of final dividends is optional even when interim dividends have been paid.
Step 3: Declare the dividend
- In order to declare an interim dividends, you will need to prepare minutes of a directors’ meeting and sign them in your capacity as a director.
- This is the case even if you are the sole director.
- The minutes will indicate the time and place of the meeting and who is present and include a note that it was resolved to pay a given Dividend on or after the date of the meeting.
Step 4: Prepare dividend paperwork
- You should prepare a Dividend voucher which states your name, the number of shares that you hold and the Dividend payable per share.
- From 6 April 2016, Dividends do not include any tax credit.
- The voucher should also indicate the date that the Dividend is payable and that this is an interim dividend.
- You should keep the Dividend voucher with your Income Tax records.
Step 5: Pay the Dividend
- The general rule is that a dividend is treated as paid when an enforceable debt is created.
- There are special rules to determine the payment date of final dividends: see Formalities for companies.
- Interim Dividends can only be treated as paid when actually paid or made available to the shareholder, by an accounting entry. They may be:
- Paid by cash or cheque, in which case they are treated as paid when the cash or cheque is physically handed to you.
- Paid by an accounting entry e.g. as a credit to a director’s loan account. A Dividend is only treated as paid when the necessary entry is made in the company’s books and the sum is made available for the shareholder to draw down on.
- If no dividend entry is made until after the end of the year when the accounts are drawn up then the Dividend is not paid until after the year-end.
- This is particularly important if the interim Dividend is intended to clear an overdrawn loan account. A timely entry must be made in the company’s computer or accounting records to fix the date of the payment.
Step 6: Taxation
- Dividends are taxed when paid.
- See Step 5 for the different explanations of what is meant by ‘paid’ in terms of final and interim dividends.