Starting your own company is an exciting venture, but you may quickly become overwhelmed with all the new terminology. In this article you’ll find explanation of one of the most important, money related terms - dividends.
What are dividends?
When you are a shareholder of a company, you may receive money for the shares you own in a form of dividend. A dividend is a payment from the company to its shareholders made out of profits after corporation tax and VAT.
Receiving payment in dividends can be an effective way to draw money from your company as they do not attract any National Insurance contributions. Dividends are distributed accordingly to percentage of the company owned (shares held) by each shareholder.
When company is owned by two shareholders, each owning 5 shares (50% of the company), with a dividend amount of £100 per share, each will receive total dividend of £500 (5 shares x £100).
How often can you be paid dividends?
Dividends can be paid at any time, assuming there are funds in company’s bank account to support it. The amount and frequency of the payment are decided by the owners of the business.
What company must do to pay a dividend?
Company must hold a board meeting to agree dividends declaration and must record the meeting minutes in company’s records. Once dividends are distributed, confirmation of distribution, called dividend voucher, has to be provided to each of the shareholders and it must include the following details:
- Date of dividend
- Company name
- Name and address of the recipient
- Total number of shares owned by the shareholder
- Total dividend payable to the shareholder
- Signature of company’s director
How is a dividend taxed?
A dividend is paid out of company’s profit after corporation tax and VAT. It doesn’t affect company’s tax position, which means it is not tax allowable expense. As it is payable to shareholders after taxes, the company is not liable to any additional costs.
The shareholders are liable to pay income tax on any dividends received. Currently, the first £2,000 (tax year 2019/20) of dividends is taxed at 0%, then the dividends within Basic Rate threshold are taxable at 7.5%, within Higher Rate threshold at 32.5% and above that in Additional Rate threshold at 38.1%. Please check the latest tax tables for updated thresholds and tax bands.
What is a dividend waiver?
When company has more than one shareholder, some shareholders may waive their right to receive a dividend. This means that a dividend will only be distributed to other shareholders. It is very important to proceed with this scenario for genuine commercial reasons and it is advisable to consult with your accountant.
If you have any questions please do not hesitate to contact us.