Making Dividend Payments to Shareholders

Dividends are a common way of remunerating company shareholders. Companies can make interim dividend payments as well as a final dividend payment, but the company must have made sufficient profit for the dividend(s) to be paid.

Many IT contractors working through their own limited companies, for example, use dividends as a way of extracting money from their companies because dividends are free of employers and employees national insurance. If you are a sole trader, dividend payments cannot be made.

How Much Can be Paid Out to Shareholders in the Form of Dividends?

If a business turns over £100,000 in a particular financial year, and the costs (salaries, expenses, etc) of running the business amount to, say, £50,000, the amount of corporation (business) tax owed would be £10,000 (using 20% as the corporation tax rate).

This would leave £40,000 available for dividends. If there were ten shareholders in the business, and they all owned the same number and type of shares, they would each receive £4000 in dividend payments if all the available money was used.

If not all of the money was used, it would remain in the company as retained earnings, which could be used at a later date to make dividend payments, or it could be used for other purposes, for example, investment.

Dividends are paid per share, so the more shares you own, the greater your dividend payment will be (when compared with another shareholder of the same type in the same company).

What is a Dividend Tax Voucher?

When a dividend payment is made, a dividend tax voucher (or just dividend voucher) must be raised and issued to the shareholder. This is sometimes done by post, but these days will probably be done electronically. This shows the size of the dividend and the amount of tax credit. The tax credit shows the amount of tax paid by the company on behalf of the shareholder.

Dividend & Corporation Tax Calculator

Company Revenue:
Salary:
Other Running Costs & Expenses:
Net Profit:
Corporation Tax Rate (%):
Financial Year:
Corporation Tax:
Net Dividend Amount:
Tax Credit:
Extra Personal Tax to Pay*:
Change the values in the highlighted fields to produce different results
Note that the calculator assumes that there is only one shareholder
*Use this figure as a guide only

A dividend voucher must contain at least the following information:

Dividends are paid after tax (at the basic rate) has been deducted. If you are a higher rate tax payer, you may well have additional tax to pay on the dividends you have received. You can use a simple online tax calculator like the one to the right to get an idea of what your tax liability will be, but it will often be worked out by HMRC at the time of completing your self assessment tax return.

Dividend payments can be taken out of company profits after corporation tax has been paid. Another example:

Turnover = £100,000

Salaries and other running costs and expenses = £30,000

Net Profit = £70,000 (£100,000 - £30,000)

Corporation Tax = £14,000 (20% of £70,000)

Amount Available for Dividend Payment(s) = £56,000 (£70,000 - £14,000)

To prevent double taxation (where both corporation tax and income tax are charged on the same profits), the dividend received carries a tax credit. This effectively states that the net dividend has been taxed at the basic rate of taxation.

This means you don't pay any further tax on your income if you are a basic rate tax payer - your taxable income is less than the higher rate tax threshold (about £41,500 at the time of writing).

For example, if you draw a salary of £20,000 and your dividend payments amount to £11,000, your total income is £31,000, which is below the higher rate tax threshold. If, however, your dividend payments amount to, say, £24,000, your total income will be £44,000, which takes you into the higher rate tax bracket meaning that you will have some extra personal tax to pay as a result of the dividend.

How Much Is The Tax Credit?

The tax credit is 10% of the gross dividend.

The dividend paid to shareholders is the net dividend.

With reference to the above example, and assuming that your salary has already taken you above the higher rate tax threshold:

The net dividend payment is £56,000.

Therefore, the gross dividend is £56,000 x 1.111111 = £62,222.22.

Therefore, the tax credit is £6,222.22 (£62,222.22 - £56,000).

If you are a basic rate tax payer, you pay 10% of the gross dividend in tax, which is considered already paid via the tax credit. Therefore, you have no more tax to pay.

If you are a higher rate tax payer, you will be charged tax at the rate of 32.5% of the gross dividend in tax.

For our example, this is 32.5% of £62,222, which equals £20,222.15.

From this figure you need to deduct the tax credit of £6,222.22.

£20,222.15 - £6,222.22 = £14,000.

This equates to 25% of the net dividend of £56,000.

Please note that the percentages quoted in the above examples will almost certainly change over time, so just insert the current percentages when making your calculations.

Is Any Other Dividend-Related Documentation Required?

Under the Companies Act 2006, it is a legal requirement to prepare board meeting minutes that are signed by the directors. The board meeting minutes can be combined with the dividend tax voucher to produce a single document if required.

A dividend is resolved as payable as a result of holding a Directors' Board Meeting. Minutes should be recorded on paper and retained for inspection by HMRC if requested. A tax credit voucher should be issued to each shareholder declaring the net amount proportional to their shareholding, tax credit amount and gross amount. The voucher should be signed and dated by a director.

Directors' Loan

As stated above, dividends can only be paid out of profit for the current year or for previous years. If you take a dividend that is too big ie a dividend that is more than the amount of profit held in the company, it ceases to be a dividend and becomes a directors' loan.

The way directors' loans are handled from a tax perspective is quite detailed.

For more information about directors' loans and dividends in general, go to:

https://www.gov.uk/running-a-limited-company/taking-money-out-of-a-limited-company

We also have a page on this website that provides information about directors' loans.

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