What are Dividends?
Dividends are payments made to company shareholders from the profits of the company. If the company has not made a profit over a given period then it cannot pay a dividend. Most limited companies pay a dividend either once or twice a year, effectively it is a reward to shareholders for investing in their company. It is up to the directors of the company to decide if and when a dividend can be paid to the company’s shareholders.
Although dividends tend to be associated with large companies, small private companies can also pay a dividend at anytime providing there are available profits in the company.
How are Dividends taxed?
Basic rate tax payers do not pay income tax on dividend income – there is a notional tax credit added to dividends of 10%. Higher rate tax payers pay an additional 22.5% income tax. Additional rate tax payers pay an additional 27.5%.
The 10% tax credit:
The tax credit applies to individuals who receive dividend income from shares they have invested in (be it their own company or listed shares).
For example, if you pay yourself £1000.00 out of the company as a dividend, this gets reported in your personal tax return as a gross dividend of £1111.11, broken down as follows:
How the dividend tax credit works:
In theory dividends are taxed as follows, but this is very misleading because of the tax credit:
|Dividend income at or below the £41,450 basic rate tax limit||10%|
|Dividend income at or below the £150,000 higher rate tax limit||32.5%|
|Dividend income above the £150,000 additional rate tax limit||37.5%|
How do I issue a Dividend?
Here are the basic procedures for issuing a dividend:
- Ensure that there are sufficient profits in the company to allow for the dividend.
- Call a meeting of the directors to minute the decision and details of the dividend.
- Generate a tax voucher for each shareholder. A tax voucher is a simple statement showing the company and shareholder details along with the individuals shareholding net dividend amount and tax credit.
- Issue the dividend payments along with the tax vouchers and file the board minutes.
It all may sound a little complicated at first but the more times you go through the process the easier it becomes also it may be worth understanding the nature of dividends as there may be distinct financial advantages for both you and your company.
For each dividend payment the company makes, you must write up a dividend voucher showing the:
- company name
- names of the shareholders being paid a dividend
- amount of the dividend
- the amount of the ‘dividend tax credit’
You need not send the tax voucher to anyone, it should simply be kept as proof of any dividend payments made.
All dividends must legally be paid out in line with the shareholding, i.e. – if there are two shareholders both with an equal 50% share in the company, any dividends paid to Shareholder 1, must also be paid to Shareholder 2 to ensure both receive the same amount in dividend payments.
Corporation Tax Rate Changes
Rishi Sunak has proposed a number of changes to the way that Corporation Tax will be calculated and applied. Learn more.
Autumn Statement – Headline Changes
Autumn Statement – Headline Changes
Extracted from the ACCA Guide to the Autumn Statement 2022
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