As a Director / shareholder of your own Limited Company you will have heard a lot about how tax efficient it can be to combine a salary with dividends to form your income.

When you make a dividend payment however you need to ensure that you’ve sufficient funds available to do so. Otherwise the dividend could be “illegal” which could cause a number of issues later down the track.

How to work out your dividend

To establish if you can pay a dividend and how much you can take there are some very simple rules to follow:

Start by working out the company profits

Income less allowable costs = company profit

Then take off the estimated Corporation Tax

The current rate of corporation tax is 19% So profits x 19% = corporation tax

Work out the “Distributable Profits”

The amount left after taking off the corporation tax is what you can take out of the company in dividends. This is known as distributable profits; a term that it’s worth being familiar with.

Quick rule of thumb calculation for distributable profits

After corporation tax at 19% then 81% of profits are distributable as dividends.

Final things to bear in mind

To arrive at the amount that you can take out of the business as distributable profits at this point in time you need to add on any Retained Profits brought forward and deduct any dividends taken already this financial year. The retained profits brought forward will be found in your last set of accounts. This figure will be nil if this is your first year of trading.

Remember that you should have a record of your dividends taken to date and they should be shown in your accounting records.

Here’s a quick recap

Income less costs = profit X 19% = Corporation Tax

Profit – Corporation Tax = distributable profits

Distributable profits + Retained Profits brought forward less dividends taken this year = Profits available to take as dividends (Distributable Profits)

Of course if this is a negative figure then you have no available profits to take as a dividend. Any dividend payments at this stage will be illegal.

The importance of up-to-date Accounting Records

Clearly to even attempt the above requires your accounting records to be completely up to date.  If you are using a digital accounting system there should be a report available to show your company profits. Some systems even show you the available distributable profits but if you haven’t got records like this it will be almost impossible.

Disguised remuneration

Dividends are not like paying a salary and should try not to fall into a trap of paying out the same amount every month.

With this in mind avoid setting up a regular payment for the same amount on the same day and make sure you perform a check on “available profits” before you withdraw any dividends.

If you need any help with this just get in touch. 

Please contact us for further information.

Disclaimer:  This App and its contents have been produced as a helpful reference point. The information should be used as a guide only and your specific circumstances are best discussed directly with us.

No reliance should be placed on this material and no action should be taken without seeking the appropriate professional or legal advice. Although the authors make reasonable efforts to ensure the content of this App is accurate and up-to-date, the authors make no representations, warranties or guarantees that the content is accurate, complete or up-to-date and accept no responsibility whatsoever for any loss occasioned by anyone acting on information within this App.