Tuesday 16 September 2014  

Limited Company

Paying Dividends

Profits of a limited company are distributed through dividends.

How much can be taken in dividends

A dividend is the distribution of 'after tax profits' so it is essential that the company has made a profit and has made sufficient provision to cover its corporation tax bill.

If this rule is not followed then the dividend could be viewed as an unlawful distribution of the company's funds.

When the dividend is paid by the company to its shareholders it is given an associated tax credit of 10% - see below to see how this is calculated.

This tax credit is a notional amount only. Nothing is due to HMRC and no further tax needs to be paid on this dividend unless you are a higher rate tax payer - see below.

It is essential that whenever your company pays a dividend to you as a shareholder, it must be formally declared at a director's meeting.

HMRC can ask for proof of the declaration of dividends and it is recommended that these documents are keep up to date.

A worked example of a dividend payment

Company Name: XYZ Limited

Company Address: 1 Any Street, Anytown, Postcode

Company Year End: 31 December

John Smith is the sole director and Jane Smith is the secretary

The company has ten shares of 1 each, all owned by John

Pay a dividend of 100 per share - 1000 in total

Companies pay you dividends out of profits on which they have already paid (or are due to pay) tax.

The tax credit takes account of this and is available to the shareholder to offset against any Income Tax that may be due on their 'dividend income'.

The tax credit on a dividend is calculated as follows:

In the above example

Click here for an example of a board minute and a dividend voucher.

Income Tax on the dividends you receive as a shareholder

Dividends that you receive as a shareholder are subject to income tax.

However if you are a basic rate tax payer you will pay no further income tax as the dividend paid has an associated tax credit (see example dividend voucher).

If you are a higher rate tax payer you will pay a total of 32.5% tax on dividend income that falls above the basic rate Income Tax limit but because the first 10 per cent of the tax due on your dividend income is already covered by the tax credit, in practice you owe only 22.5%.