Dividends
Dividends A-Z
1. Definition
The definition of a dividend is, money available for shareholders after all the expenses, tax liabilities, provision for liabilities if the business has sufficient cash balance to issue a cash dividend. If the business has sufficient accumulated profits, then the business can also issue dividends even in the year of loss. Zero One Consultants refers here not to confuse or mix up a current year loss with the accumulated profits. E.g. if a business has £100,000.00 in accumulated profits but due to unseen reasons business did not do very good in a current year and had no profit/s, low profit or a loss and the business still decides to issue a reasonable dividend to its shareholders there is no restriction on it.
2. Need
If owner directors have settled, the decent profit-making business then owner directors normally choose to take most profits from their company by the dividend route. This is not always the most tax efficient route, but in the business of reasonable turnover and profits this may turn out to be the best way. It certainly does not attract national insurance, and, for base rate taxpayers, the tax is not payable on dividends although the tax bands have been reduced. Zero One Consultants always recommends that you have a professional advice on the dividends matter especially if you are taking a/or continuous, interim dividend/s or withdrawing your remuneration as dividends. Zero One Consultants will be able to advise you if you have any concerns.
3. Tax Efficiency
As discussed not always but a majority of the time if you are the owner-director of the business then this is the most tax efficient way to withdraw the amount for your use. Every investor shareholder has a tax-free allowance, and then they can utilise low tax band of income tax and then also not to pay the national insurances.Check your Dividend Rates. If a limited company has made a profit, it is free to distribute these funds to its shareholders after paying their corporation tax. Working via a limited company is a tax efficient way to operate, as National Insurance Contributions (NICs) are not payable on company dividends, whereas they are payable on salaried income. That is why Zero One Consultants strongly advise you always to have a professional advice to have an optimal solution of your earnings from your own company.
4. Frequencies
There are few types of dividends in existence, but the most common are the yearend dividends, and then the dividends directors withdraw each month, quarter or a fixed period as a substitute for salary. You are not to be confused with these types of dividends with interim dividends.
This is the most authentic and enforced type of dividends. Every year you have your business declaring the tax accounts and returns to HM Revenue & Customs (HMRC), and now the business wants to reward its shareholders for their investment and trust in the business. After tax profit is available to distribute to the shareholders in the form of dividends. Even if the business did not profit in current year profit, but there are accumulated profits in the business, and if the business decides to distribute the dividends, dividends still can be issued to shareholders. Final dividends are proposed by the directors and approved by the shareholders, normally once the year-end results are available.
Based on the accumulated profits or if the business has earned a decent profit during the year, profits can still be distributed as dividends between the shareholders. Interim dividends are declared by the directors if there is a sole director who is also the sole shareholder, the company needs to document their actions in both capacities. A company does not have to pay dividends during the year, but if the company decides to do so, the last dividend must be a “final” dividend. If at year-end, the shareholders and directors decide not to pay any dividends further to the interims dividends already paid, it can declare a zero-final dividend
Not necessarily but mostly, in single director owner, personal service companies and close companies this is the most common way of taking dividends during the year. A quarterly, monthly or biyearly payment of dividends may be made. Directors may also want to take their reward in dividends as compared to salary. Zero One Consultants strongly recommends you to have a professional opinion and plan as you may need an up to date cash flow and dividend register for these types of dividends. HM Revenue & Customs (HMRC) will not tolerate withdrawal of dividend from losses declared on the year-end.
5. Types of Dividends
A dividend is a cash payment issued to the shareholders of the company. However, there are several types of dividends, some of which do not involve the payment of cash to shareholders and they are not known as common as some others may.
- a. Cash Dividends (cash, pay orders bank or company cheque)
The cash dividend is by far the most common of the dividend types used. On the date of declaration, the board of directors resolves to pay a certain dividend amount in cash to those investors holding the company's shares on a specific date. The date of records is the date on which dividends are assigned to the shareholders of the company. On the date of payment, the company issues dividend payments. Value of dividend paid is the value for tax purposes.
A share dividend is the issuance of shares by a company to its common shareholders without any consideration. These types of shares are issued when the company is low on liquid (cash funds) assets, and the company is taking an opportunity to increase their share capital as well but not necessarily. These shares are issued for the value of dividends declared, e.g. a dividend declared of £100.00 will be the number of shares, depending on the company share value, e.g. if each share value is £1.00 then 100 shares and if each share is valued at £10.00 then 10 shares will be issued to shareholders. Value of dividends paid and declared by the company is the value for tax purposes.
A company may not have sufficient funds to issue dividends soon, so instead, it issues a scrip dividend, which is essentially a promissory note (which may or may not include interest) to pay shareholders at a later date. This dividend creates a note payable. They are not taxable until shareholder receives the payment, once the payment is received the payment received will be the full value for tax purposes.
A company may issue a non-monetary dividend to its shareholders/investors, rather than making cash or share payment. It is an extremely rare type of dividend and may only be suitable for the company with few assets to dispose and very few shareholders. The value of the property will be taken as the value for tax purposes. Since the fair market value is likely to vary somewhat from the book value of the assets, the company should record the variance as a gain or loss. This accounting rule can sometimes lead a business to deliberately issue property dividends in order to alter their taxable and/or reported profits.
When the board of directors wishes to return the capital originally contributed by shareholders as a dividend, it is called a liquidating dividend and maybe a precursor to shutting down the business. Liquidating dividend is similar to the entries for a cash dividend, except that the funds are considered to come from the additional paid-in capital account
6. Documentation
Often, the company has little or no documentation to support dividends. The directors can explain and justify the payment and think this is sufficient, in director’s view. This is not correct. HM Revenue and Customs argue that, where a payment does not comply with Companies Act requirements for dividends, it is not a dividend. So, it must be either salary or loan, both of which have tax and national insurance implications. Now, it appears that an incorrectly processed and documented dividend could be subject to both Corporation and Income Taxes. Also, there will be employer’s and employee’s National Insurance. The marginal tax rate could be over 60%. Correctly processed dividends can incur, perfectly legally, a marginal rate of 20%, a material saving.
One Consultants strongly recommend you maintain three most important documents, and accounts need;
- Dividend Ledger
- Dividend Warrant Register
- Dividend Registers
All the dividends previously issued or if the board decides to issue the dividends for a particular time or period the amount transferred into the dividend control account which is going to be disbursed into the shareholders as a dividend payment. The reserves it's coming from that is either accumulated profits or current year’s profit or any other distributable profits. It needs to show clearly how much is paid out and how much is still available to pay out. This account should also reflect if some previously declared dividend is still not issued to the right shareholders.
- b. Dividend Warrant Register
More like a chequebook, once a cheque is issued business have the counterpart (cheque stub) to prove and reconcile payment.
A detailed version of the dividend warrant book with the details of, company name, company number, company address/s, shareholder, shareholding, amount issued, date issued, authorising directors, total company share capital, list of shareholders, percentage ownership of each shareholders, People with Significant Control (PSC), tax details of rewarding shareholders, dividend control account balance, amount to be paid to each shareholder.
☞We strongly recommend you consider our Trusted Management Services (TMS) services if you are looking to withdraw regularly dividends from your company.
7. Legalities
The company must issue dividend vouchers. It is legal to issue one voucher per shareholder that includes all interim and the final dividend. However, this may lead to confusion about the payment date.
As far as HM Revenue and Customs (HMRC) are concerned, the effective date of a dividend is the date on which payment becomes unconditional. This is normally
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i. Interims: the date the company pays the dividend; for directors, this can mean the date the company credits the director’s loan account. (Do not mix with the normal director loan account here which is when director loan physical amount to the business, this is entirely when the dividends are issued but not paid yet)
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ii. Finals: the date the shareholders resolve to approve the dividends. The effective payment date for the final dividends is not normally the same as the date the company’s accounts report the dividend. The company may wait until it has its (draft) final accounts before deciding the final dividend. This could be almost 9 months after its year-end. Once approved by the shareholders, the accountant will include the final dividend before publishing these accounts.
- ☞The date is significant for personal tax planning. Incorrectly timed, dividends will fall into the wrong tax year. Zero One Consultants will strongly recommend you to have a plan for your dividend withdrawals.
The company must document dividends in a dividend register, contact Zero One Consultants for one to be provided. It contains a lot of information you may need in case of an enquiry from HM Revenue & Customs (HMRC).
Zero One Consultants will explain to you the process which is not difficult once understood along with all the correct procedures. The company must complete and document the process following the procedures when declaring dividends. Attempts to create the necessary documentation retrospectively are fraud and would invalidate the dividend.
- Declare interim dividends or Propose a final dividend in meeting of directors
- Declare final dividends when shareholders resolve to approve the dividend
Prepare the documentation:
- Prepare Minutes of the meeting, either director/s for interim or shareholder/s for final dividend.
- Directors approval for the interim.
- Shareholders’ approval for the finals
- Dividend vouchers not essential for interims as they are going to directors and then they will be credited to their loan account.
- Once approved by the shareholder's dividend vouchers will be issued.
- Entry in dividend register will be made either an interim or final dividend.
- Prepare the documentation: Minutes of the meeting and keep records of minutes and resolutions then distribute vouchers to the shareholder.
- Update your dividend register.
- Pay or journalise dividend.
