01 Apr Dividends – Do you know the rules?
For many years now, Accountants have been encouraging directors in owner-managed, limited companies to take their remuneration as a combination of salary and dividends in order to benefit from significant personal tax savings. Whilst recent changes in tax legislation have reduced the savings available, it is still generally advantageous for director/shareholders to take a combination of salary and dividends.
However, there are procedures that must be followed when dividends are declared and not all directors are aware of the rules, or are not following them. This puts them at risk of paying illegal dividends and consequently finding themselves with an unexpected tax bill or personal liability if the company were to become insolvent.
So, what are dividends and what are the rules?
‘A dividend is a payment a company can make to shareholders if it has made a profit’ – H M Revenue & Customs.
Dividends can only be paid from retained post tax profits, which have been generated in year or brought forward from prior periods, and they are usually distributed to all shareholders in accordance with the percentage of the shares held in the company. There are no rules as to how often you can distribute dividends, but all dividends must be legal i.e. there is sufficient retained profit in the company to cover them and you must:
- hold a directors’ meeting to declare a dividend; and
- keep minutes of the meeting, even if you are the only shareholder.
For each dividend paid the company must prepare a dividend voucher showing the following information:
- the date
- the company name
- the name of the shareholder being paid
- the amount of the dividend.
A copy of the voucher must be given to the shareholder in receipt of the dividend and a copy should also be kept for the company’s records. An electronic dividend voucher is acceptable provided it has been previously agreed by the shareholders.
If you would like a template for dividend vouchers and meeting minutes, contact us at firstname.lastname@example.org and we will happily send them on to you.
To fully benefit from the flexibility of dividends and make payments in a timely manner, it is important to have up to date accounting information. Since the implementation of Making Tax Digital, many business owner are benefiting from cloud accounting which allows them to access real-time information and ensure they have sufficient distributable profits from which to declare dividends without the intervention of an accountant.
However, using the information from your software will only give you a reliable answer if your record keeping is full and accurate and if your opening balances are corrected where required. If your accounting system does give you accurate information, remember to keep a copy of the information to support the payment of the dividend.
If you are taking dividends as part of your remuneration package and want more guidance as to the surrounding legislation or the most tax efficient way for you individually to take remuneration from your company, please contact us and we can help you make sure you do not have any unpleasant surprises.