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What is a Dividend ?

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What is a dividend?

One of the most common questions I am asked is whether a Company Director / Shareholder can take a dividend to reduce their corporation tax bill ?

I believe it is a popular misconception that a dividend is some sort of business expense that helps to reduce bills but it most certainly is not so here is a short guide .

If your Limited Company has made a profit, it can distribute these earnings to shareholders by way of a dividend once tax is set aside. These are called distributable profits and here is how they are calculated:

Profit = Income less allowable expenses

Distributable Profits = Profit plus reserves from earlier years less Corporation Tax

Reserves are any retained profit in a limited company that has accumulated over a number of months or years. If the director(s) choose not to distribute any excess profits as dividends at the end of the company’s financial year, then they are carried forward as reserves and are available to distribute at a later date.

So the amount you can take as a dividend is always after the Corporation Tax has been calculated. Here is an example and assumes no reserves or retained profits coming forward:

Profit for the year = £10,000. Corporation Tax @19% = £1,900 so the amount that can be taken as a dividend is £8,100.

How does your company issue a dividend?

If you want to issue a dividend, then you need to hold a meeting of directors to declare the dividend. The meeting needs to be minuted and a record kept of it. This is the case even if you are the sole director of your limited company, though it may then just be a case of issuing the correct paperwork.

For each dividend payment your company makes, you need to issue a dividend voucher that shows the following:

  • date the dividend is paid
  • company name
  • names of the shareholders being paid a dividend
  • amount of the dividend.

You should give a copy of the voucher to all recipients of the dividend amount and keep a copy for your company’s records. Remember also that dividends should be distributed according to the percentage of company shares owned by each shareholder so you have to make sure that each shareholder is treated in accordance with the number of shares they hold.

So that’s all there is to it. Dividends can be a great, tax efficient way to distribute profits and if you have any specific queries please get in touch.