Are you thinking about setting up a limited company and want to know more about dividends? Have you heard about paying yourself a dividend but don’t really understand much about it? Then read on …
Firstly, let me explain what a dividend is. Quite simply, a dividend is a payment made by a company to shareholders from profits of the company. Your company can only pay a dividend if there are available profits after paying any corporation tax due. Dividends are usually a fixed amount per share and paid to all shareholders in proportion to their shareholding. So if your company is profitable you can choose to keep the profits in the company or pay out all or part of the profits by means of a dividend. It is illegal to pay a dividend if there are no profits available.
If I want to pay a dividend what needs to happen?
• You must hold a directors’ meeting to declare that a dividend will be paid.
• You must keep minutes of the meeting.
• You must prepare dividend paperwork. A dividend voucher needs to be given to each shareholder and a copy kept for the company’s records.
What are the tax implications when paying a dividend?
• Your company does not have to pay any tax when a dividend is paid, as the dividend is a payment from profits after corporation tax.
• If the shareholder is a basic rate taxpayer there will be no further income tax due on the dividend received.
• For a higher rate tax payer, 25% of the dividend amount received will need to be paid in income tax when it is declared on your personal tax return.
So to put it simply, here’s what you need to do
• Ensure there are profits
• Call a meeting of the directors and prepare minutes
• Complete the documentation
• Make the payment
The question for company owners is then how much do I pay myself in salary and how much do I pay in dividends? Dividends may be favoured because there is no national insurance due. The right answer depends on the individual circumstances and that is where Embarc can help. We will happily meet with you to discuss dividends v salary and what is right for you.