Dividends are payments that limited companies can give to shareholders from their profits. They're a way to reward investors or performance. However, the tax rules for dividends are different from other types of income.
Can any business pay dividends?
Many business owners pay themselves from the profits they earn. However, because limited companies are separate legal entities from their owners, the process is more formal, leading to dividend payments.
Different business structures have their pros and cons, depending on your situation. Many opt for a limited company because it allows them to take part of their income as dividends, which can sometimes be more tax-efficient.
Who can receive dividends?
Companies can distribute dividend payments to their registered shareholders based on the proportion and type of shares they own. In some cases, shareholders also serve as directors in the company, but not always.
What is the difference between shareholders and directors?
Shareholders own the company through holding shares in it and are often referred to as "members". Directors oversee the business operations and are typically more involved in day-to-day activities. In smaller businesses, it's common for one person to serve as both the sole shareholder and director.
How much can a company pay in dividends?
In theory, there are no restrictions on declaring dividends if the company has profits available after paying taxes and other obligations. However, it's usually wise to retain some funds in the business for future growth and cash flow management.
Since profits can vary from year to year, the amount available for dividends may fluctuate as well. Additionally, the dividend amount a shareholder receives depends on their share ownership and the type of shares they hold. Some companies issue different types of shares to offer flexibility in shareholder entitlements.
Can directors still take a salary if they receive dividends?
Yes, definitely! Many company directors who are also shareholders opt for both a salary and dividends because it can be a tax-efficient way to compensate themselves from the business.
It can get a bit complex, so we will make another guide that explains director's salaries in more depth.
What are the tax implications of taking a dividend?
Dividends aren’t taxed at source in the same way that salaries are, so you’ll need to submit a Self Assessment tax return to make sure you pay the right amount of tax on any dividends you receive.
In the 2023/24 tax year the Dividend Allowance is £1,000, which means you won’t pay dividend tax on the first £1,000 of dividends that you receive in a year. You can use the allowance on top of your Personal Allowance too!
In need of an accountant or want us to join your journey? Contact info@kmaccountancy.co.uk or 0141 266 0563.
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