If your limited company has made a profit, it can distribute these earnings to shareholders by way of a ‘dividend’. Profit is the money the company has remaining after paying all business expenses and liabilities, plus any outstanding taxes (such as Corporation Tax and VAT).
It’s important to remember that dividends cannot be counted as a business expense when calculating your Corporation Tax and that it’s illegal to pay a dividend if your company does not have sufficient profit after tax available to cover the dividend amount.
Any ‘retained profit’ in a limited company could have been accumulated over a number of months or years. If the director(s) choose not to distribute any excess profits as dividends at the end of the company’s financial year, then they remain available to distribute at a later date.
Dividends can only be paid out of post-tax profits or retained earnings. This is profits from previous years not taken from the business or used by the business. That is, if they relate to your own limited company. If your business has made a loss in a year and has no retained earnings, there are no dividends able to be taken.
The first £2,000 dividends are tax-free irrespective of how much money you earn (for 18/19 tax year and beyond). Any dividends in excess of £2,000 will be taxed. As long as you remain a basic rate taxpayer (ie when you add together dividends and salary and any other income landing in your personal name) at 7.5%. A basic rate taxpayer is an individual whose total income is no greater than £46,350 in 18/19 tax year. If you take dividends in excess of £2,000 and are a high rate tax payer then you will pay 32.5% dividend tax. 38.1% dividend tax will be paid as an additional rate taxpayer.
If you wish to release “interim” dividends to the shareholders to take full advantage of the dividend allowance. In a particular tax year, you will need to make the money transaction (ie move money from the limited company to the director’s personal bank accounts). You will then prepare an “interim” dividend certificate per director receiving the dividend. This shows the value of dividend, which shareholders receive it. It will also show the date and then signs it as a director of the company.
Please remember that you can only pay a dividend at an interim date, if at that date your accounts showed your business to be in profit. In addition, the value which means the dividend taken is no more than 81% of the profit. I would recommend taking a pdf of the P&L on this date and retaining with your interim certificate should you ever be asked to prove at the time the dividend was taken your company was in profit.
What documents are required for dividend distributions?
Dividend Certificates. The Director of the company must write up a dividend voucher showing the:
Names of the shareholders being paid a dividend
Amount of the dividend
You must give a copy of the voucher to recipients of the dividend and keep a copy for your company’s records.
When you take a salary above a certain value. The equivalent of the Lower Earnings Limit for national insurance purposes. This is £116 for 18/19. The company paying this salary needs to register with the HMRC PAYE team (at least 2 weeks in advance of the first payment of salary by the company) as an employer and then submit monthly reports to HMRC PAYE on the amount of salary paid.
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This guide was written specifically for Smart Accounting clients. Some of the information contained in this guide might not be applicable if you do not have a business managed by Smart Accounting. By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details are correct at time of writing.