Most directors of limited companies pay themselves in some combination of salary and dividends, often supplemented by pension contributions from the company.
Whilst this is one of the most efficient ways for owner directors to be paid there are pitfalls if i's aren't dotted and t's aren't crossed - let me explain.
What are Dividends
A dividend is simply a share of the company’s profits. Profit is what is left over after the company has settled all its liabilities, including taxes. If there is no profit, then no dividends can be paid.
Dividends can be paid to directors and other shareholders, according to the proportion of shares that they hold. There is no requirement to pay all the profits as dividends, or even any of them. A company can retain profits over a number of years and distribute them as the board decides.
Key Points:
You must hold a directors’ meeting to ‘declare’ the dividend
Minutes of the meeting must be kept
These usually include a review of the financial performance and position of the company including its upcoming cashflow commitments
For each dividend payment the company makes, a dividend voucher must be produced
This must include the date, company name, names of the shareholders being paid a dividend, and the amount of the dividend
A copy of the voucher must be given to recipients of the dividend and a copy kept for the company’s records
Interim and Final Dividends
A dividend may be authorised in one of two ways:
it is declared and approved by the directors. This is known as an ‘interim dividend’; or
it is declared or proposed by the directors and approved by the shareholders by written resolution or in a general meeting. This is a ‘final dividend’.
The main difference for our purposes between an interim dividend and a final dividend concerns the date on which the dividend is treated as paid.
As an interim dividend may be varied up the point at which it is paid, it is treated as paid when the shareholder receives the money or when the funds are placed at the shareholder’s disposal (for example, where the sum is credited to his/her loan account with the company).
As the declaration of a final dividend creates an immediately enforceable debt, a final dividend is treated as paid on the date that it is declared. There is one exception to this general rule: where the resolution fixes a later date for payment, the dividend is deemed to be paid on that later date.
Alternative Dividend Distribution
There are ways in which this can differ such as when alphabet shares have been issued or when a dividend waiver has been put in place however there are specific criteria that needs to be met and this is not possible retrospectively.
For example, alphabet shares need board resolutions drafting and articles of association amending (where model articles have been adopted).
What if I just take money out of the company and call it a dividend?
When a director takes money out of the company and it is not salary, dividend, or payment for expenses incurred, it is generally classed as a Directors Loan.
This effectively means you owe the company money as you have taken a loan from it. At this point in time it is not treated as income for you personally. If however, the loan reaches £10,000 at any point in the year this triggers a Benefit in Kind for the director and therefore additonal tax to pay for both the company and the director.
As explained earlier dividends must be declared properly and the correct paperwork issued. Failure to do this will result in either no dividend being declared or an illegal dividend.
If you would like advice or guidance about declaring and preparing dividends, or using dividends as part of your remuneration structure - Freedom Cloud Accounting can help you - please get in touch.
Comments