A dividend is a payment a company can make to its shareholders out of the profits it has made.
It is not a cost of business, so it won't appear as an "expense" in the profit & loss account - rather, it is a distribution of profits.
Where the shares in issue are all of the same class, each shareholder will normally receive a dividend in proportion to the number of shares they hold.
Declaring a dividend
To pay a dividend, the directors of the company normally hold a meeting to "declare" the dividend; the meeting should be minuted as a record of the decision.
Retained profits and illegal dividends
Companies are not allowed to pay a dividend in excess of "distributable profits". This sounds complex, but the concept is pretty simple really. All it means is that a company cannot pay out a dividend in excess of the profits that it has made (and not previously paid out). Think of "distributable profits" as a piggy bank - when the company makes a profit (after allowing for corporation tax), it tops up the balance in the piggy bank - when it pays out a dividend, it reduces it again. The key figure to watch is the "retained profits" figure in the balance sheet.
When making a decision about declaring a dividend part-way through a financial year, if there is any doubt whether there are sufficient distributable profits available, reliable and up-to-date management accounts will be needed to confirm the position, before a final decision is made.
When a dividend is to be paid, a dividend voucher should be prepared for each shareholder showing the:
- company name
- shareholder's name
- amount of the dividend
Each shareholder should be given a voucher, and the company should retain a copy for its own records.
For our corporate clients we prepare the appropriate board minute and dividend voucher(s) as part of our standard service.
The shareholders may be liable to pay income tax on any dividends received. Dividend income is declared on the individual's Self Assessment tax return. UK taxpayers can receive up to £2,000 in dividend income (in 2019/20) without paying income tax, but dividend income above that level is subject to income tax at rates of 7.5%, 32.5% or 38.1%, depending on the taxpayer's other taxable income in the tax year.
The payment of a dividend is not a taxable deduction for the company (again, because it is a distribution of profits, not a business expense).
If you need any assistance with getting your dividend processes and procedures right, contact us today.