If you’re looking at paying a dividend from your business to yourself or your shareholders, it’s a positive sign of a successful year, but you should always discuss matters with their small businesses accountants first.
But there are still certain rules that have to be adhered to and there are ways you can use your dividends to be more tax efficient.
Our accounting services team has put together this little info blog.
What are dividends?
A dividend is basically the money that shareholders receive from the business based on its profit. The bigger businesses tend to pay their shareholders a dividend “once or sometimes twice” a year, but for a small business with only one or two working shareholders, they can choose to pay more frequently.
Speak with your accountants in London first, but paying dividends monthly could be more tax-efficient for you as owners rather than receiving your remuneration as a salary.
A very important rule to note regarding paying dividends is that you are only entitled to declare a dividend if your company is profitable. Your small business accountants will be your professional guides and help you work out how much dividend to pay after they have finally calculated your profits which will be shown as net of corporation tax.
A dividend paid when a company is not in profit is called an ‘unlawful dividend’, so we make sure you never fall foul of HMRC rules.
When you set up your company’s Articles of Association, they are likely to have provisions in them regarding the declaration of dividends, or it may be that there is a shareholders’ agreement to reference dividends.
There are other aspects that our accounting services team will advise you on, such as different classes of shares, that can utilise different types of dividend and the declaration of special dividends that can be paid outside of the normal course of dividend payments to return surplus cash to shareholders, or in connection with a possible merger or acquisition.
Other Dividend Hot Tips
As previously mentioned, a company must make profit to declare a dividend, If a dividend is paid by a loss making company, it is deemed unlawful, which will have consequences at a later stage. However there are no set limits as to how much this profit should be.
Company’s should be cautious with dividends based on a small profit as the money would probably be better left in the business. Make sure you fully discuss this with your small business accountants, before issuing any instructions.
The amount of dividend paid in cash terms to shareholders is normally representative of the number or percentage of shares owned. Ie if you own 10% of the shares, you get 10% of the profits. It is normally left to the directors to confirm the value of the dividends paid. There is no limit as to how often or how much a company can pay in dividends.
Once you have spoken to our accountancy service and the decision to pay a dividend is made, it’s normal that a directors meeting is called and a dividend voucher showing the company name, the date and the dividend amount is issued with payment.
As companies don’t pay any tax to HMRC on dividends, the pot of money is calculated after Corporation Tax has been deducted.
Make Dividends Tax Effective
There are things we can help you to do to save your business some tax, by looking at the way you as a company director are paid. Option one is that you can choose to pay yourself through PAYE (salary) or option two you can pay yourself via dividends.
As specialist accountants in London, we often advise clients that a combination of the two is likely to be the most beneficial to you. If you actually give yourself a lower salary and a higher dividend under the current tax legislation, this is usually the most tax effective combination.
You don’t pay National Insurance on dividends, and depending on how many dividends you pay yourself, we can help you to minimise your personal tax liability.
When we make the end of year calculations for your company’s corporation tax, we can claim the cost of your salary, therefore making an overall saving on taxes for the business.
The Wrap
It’s a great position to be in, declaring dividends, but maybe it’s wise to be a little conservative and leave some of your profits in the bank for business growth next year.
Remember you do not HAVE to pay yourself dividends.
As your professional small business accountants, we will make sure that everything that is done is in the best interests of you and your business.
Let us use our experience to get the best out of your business.
Please book a meeting or call at a time which suits you with one of our specialists.
