Dividends are money that limited companies pay out to people (shareholders) who own shares in the company. This article provides a brief introduction to dividends.
Please note: If your business is a sole trade or partnership, it can't pay dividends.
Why are dividends important?
It's important to remember, if you're employed by a company, that the money the company earns doesn't all belong to you personally. That applies even if you're the only director and only shareholder in the company. The money the company receives in sales revenue belongs to the company, and there are only three ways you can take money out of the company.
One is for it to pay you a salary for the work you do as an employee or director. The second is for it to pay you a dividend on the shares that you own in the company. And the third way is for it to pay you back money that it owes to you.
That's it. There are no other legitimate ways for the company to pay you money.
What if the company pays me too much?
If you take out more than you're owed, there may be extra tax to pay.
And it's illegal for your company to pay out more in dividends than it has available as profit for this year or profit held over from a previous year.
Dividends count as part of your income for personal tax.
But the company's got cash in the bank, surely it's OK for it to pay a dividend?
Remember that profit is not the same as cash in the bank. There are non-cash items which may affect your profit, such as depreciation of capital assets. So before you pay a dividend, make sure that you check your profit and loss account in FreeAgent to see that you have enough profit available after tax. This will be the 'Carried forward / distributable' figure. You can also find this in the mini 'Profit And Loss' widget on the 'Overview' screen.
In the picture below, you can see this company has paid illegal dividends, because the 'Dividends' are higher than the 'Carried forward/distributable' figure.
Remember that dividends come after corporation tax on the profit and loss account, so when you pay dividends, you have to allow for corporation tax to come first!
If you have an accountant, talk to him or her about how much the company can pay out as a dividend.
What must I do when I want the company to pay me a dividend?
Whenever a company plans to pay a dividend, it must check its profits to make sure it has enough to cover the dividend, then have a meeting of the directors and produce board minutes and vouchers. The minutes must be produced even if the company has only one director. But don't worry about them, because every time you record a dividend on FreeAgent, it will generate the minutes and vouchers for you.