Help? How do I Pay a Dividend?
We asked accountants Riley & co to answer some frequently asked questions about dividends, as sub-contractors often work through their own limited companies.
Why do I need to think about dividends?
“If you are a director of your own limited company, you will probably pay yourself a small salary and take the rest of your income as a dividend. This is the most tax efficient way for you to extract your cash, as dividends are not subject to national insurance.
“However, in order to ensure that your dividends stand up to scrutiny from HMRC it is important that they are paid correctly.”
How do I work out how much to pay?
“Dividends are paid to shareholders from the retained profits of the business. The retained profits are calculated after allowing for corporation tax (currently at 20%) on the net profit of the business. The net profit is calculated as the income less the business expenses such as salaries, travel and subsistence, telephone costs etc.
“The retained profits are calculated on a cumulative basis and also include the profits after tax for earlier years which haven’t yet been paid out as a dividend.
“If you get this calculation wrong and there are insufficient retained profits out of which to pay your dividend then your dividend could be illegal which causes all sorts of problems when your year-end accounts are prepared.”
What about the paperwork?
“Once you have done your sums correctly, the next step is to vote the dividend at a directors meeting and create the meeting minute and dividend voucher. Riley & co offer a company secretariat service for creating these documents as it is crucial that the paperwork gets done.”
My partner is a director too – how does that work?
“Don’t forget that dividends must be paid at a pro rata amount to every shareholder for each class of share on which a dividend has been voted. You then need to make sure that you correctly make the payment; the dividend must be paid to a bank account belonging to the individual shareholder named on the share certificate. If you have a joint bank account then this can be used for each shareholder who is named on the account. Make sure the payments are recorded in the books, recorded as dividends and that the narrative “dividend” is used for any online bank transfers.”
Can I credit the director loan account instead?
“It is also possible to ‘pay’ a dividend as a credit to a director loan account, but in order to evidence the transaction you need to make sure that an appropriate entry is made in the accounting records on the date that the dividend is declared.”
How often should I pay a dividend?
“Dividends can be paid as often as you like, many of Riley & co clients choose to process dividends on a monthly or quarterly basis, although it can be as ad hoc as you like, as long as you go through each of the necessary steps every time that you make a dividend payment, then the frequency is up to you.”
Riley & co can talk to you about how to improve your tax planning flexibility by using different classes of shares, just get in touch on firstname.lastname@example.org or contact Riley & co reception on telephone 01422 341019, if you think you may benefit.