You want to pay a dividend because you’ve heard it’s the most tax-efficient way of taking an income from the business. But the process isn’t as simple as just drawing out cash.
With dividends, its important you follow the right steps. HMRC are hot on compliance checks to ensure payments being recorded as dividends really are dividends.
Dividends can be a really good option because they are free of National Insurance
Dividends can be paid to the director(s) and shareholders in the business based on the proportion of shares they hold.
Taking dividends is considered a better option for business owners and shareholders than taking a salary, because it is more advantageous in its tax treatment. You will have to pay tax on them though, ideally you want to put some of every dividend into a savings account so you don’t get caught out when you do your tax return.
If you plan on taking dividends you’ll want to be sure you have a good accounting system in place (or good support with the accounting) so that you do it in the most tax efficient way.
You’ll also want to make sure you’re following the correct process in taking them.
Not completing the steps correctly may mean HRMC view your payments as salary
In order to pay a dividend:
- Your business must have sufficient profits to cover the dividend
- Dividends paid out must be in proportion to shareholdings
- The dividend must be properly declared.
Not completing the process correctly may mean that HMRC will argue your dividend payments are actually salary payments, causing a demand for National Insurance as well as potential interest and penalties.
It can also lead to issues with overdrawn directors’ loan accounts and loan interest charge problems.
So what is the process to pay a dividend
We recommend following these steps to reduce the chance of an issue arising:
1. Make sure your bookkeeping is up to date
Dividends can only be paid from distributable reserves. These are defined as your total profits and losses less any tax due and dividends previously paid. It is important to be sure that these reserves cover the required dividends by ensuring your bookkeeping is up to date and reviewing your Balance Sheet.
2. Hold a board meeting
Every time you declare a dividend you should record the decision in writing. The easiest way to do that is to hold a board meeting. This meeting needs to be minuted and will include the details of the dividend to be paid. The minutes need to be signed, dated and retained. You must still do this even if you are a sole director company!
3. Issue a dividend voucher
Once the dividends are agreed you need to issue a dividend voucher to your shareholders. This is essentially a dividend receipt and needs to be retained as evidence of the dividend paid, for their self assessment tax return. The dividend voucher needs to include:
- The company’s name
- The company number
- The type of share
- The number of shares held by the shareholder
- The name and address of the shareholder
- The amount of the dividend
- The signature of an officer of the company
4. Now pay the dividend!
After you’ve completed steps 1-3, the dividend can be paid. You will need to ensure that the payment from the bank account is clearly marked as a dividend payment.
Know what you can take, and get all the accounting support you need to do it right
We have a helpful blog here that answers the common question: How much can you take as dividends?
Technically a dividend is a distribution of post tax profits. This means that you need to take into account estimated corporation tax before you draw money out of the company.
Before you go through the process and all the documentation stuff, talk to us about how taking dividends fits in with your life and goals.
One of the nice things about dividends is how flexible they are. You don’t have to pay all the profits out. How much you choose to pay could depend on how much money you need to support your lifestyle, what income you need to get a mortgage, or how much you can declare without having to pay tax at a higher rate.
We’re here to help you get it right.
