A Guide to Dividends for UK Limited Companies

Dividends represent a share of the company’s profits that can be distributed to its shareholders, However, taking dividends involves certain criteria and procedures that must be followed to ensure compliance with the law and tax regulations. In this blog, we’ll break down what dividends are and provide a step-by-step guide for Limited companies on how to distribute them. 

What Is a Dividend? 

A dividend is essentially a share of the company’s profits, usually distributed in the form of a cash pay-out to shareholders. These pay-outs are not considered a company expense, and they are paid out after the company’s expenses and corporation tax have been accounted for. 

Criteria for Taking Dividends: 

To take dividends from your small, limited company, you need to meet specific criteria: 

Shareholder Status: 

You must be a company shareholder to receive dividends. Just being a director of the company doesn’t qualify you for dividend payments. 

Sufficient Profits: 

Dividends can only be paid if your company has enough profits after deducting expenses and corporation tax. This means that if your company isn’t profitable, you cannot distribute dividends. 

A general rule of thumb for making sure you have profits available to take dividends during the year is the following:  

1. Work out for your company turnover 
2. Take off any company expenses (make sure you are including any expenses not yet paid/loans the companies owe) 
3. Put away a further 20-25% to account for corporation tax 
4. The figure left over is generally a good estimate of the company profits. 

Remember having money in the bank does not equal profit (in accounting terms).  

Tax Rates on Dividends: 

Tax Allowance: 

In the UK, there’s a tax allowance on dividends. As of the last update, you can take up to £1,000 in dividends per year before they are subject to taxation. It’s important to note that this allowance may change over time. 

Tax Rates: 

Depending on your total income, dividends may be subject to different tax rates.  

As of the last update, the tax rates for dividends in the UK were as follows: 

Basic rate: 8.75% 

Higher rate: 33.75% 

Additional rate: 39.35% 

Paying Dividends:  

In order to pay dividends HMRC advises that you comply with the following:  

Hold a Directors’ Meeting: 

Convene a meeting of the company’s directors to “declare” the dividend. Even if you are the only director, you should still hold this meeting. 

Keep Minutes: 

It’s crucial to keep detailed minutes of the meeting. This should include the date, company name, and the names of the shareholders who will receive dividends. 

Create a Dividend Voucher: 

For each dividend payment, create a dividend voucher that includes: 

The date of the payment 

The company’s name 

Names of the shareholders being paid a dividend 

The amount of the dividend 

Dividends can be a tax-effective way to pay yourself from a limited company as they are taxed at a lower rate than income tax.  

For more information on paying yourself as a company director please see the link below: 

https://www.helpboxuk.com/taking-monies-out-of-a-limited-company/