Article | Fabulous Women

What all company directors should know about taking dividends legally!

Posted on 15/08/2012

Written by Alida Ballard of Surrey Accountancy Services Ltd.

As a director of a limited company, you may be regularly withdrawing monies from your business, with the view that the withdrawals are a mixture of 'salary' and 'dividends'. Your expectation may be that your accountant will sort out the split of the actual figures, when they come to prepare the statutory accounts at the year end.

This article is intended to clarify when you can legally be paid a dividend and what steps you should take in order to abide by the rules set out by the Companies Act.


The dividend must be legal 
You can only legally be paid a dividend from profits from the current year (after you have allowed for the Corporation Tax that is due on that profit) or retained profits from previous years (as long as there are enough funds to pay the company's liabilities at that date)
If you take interim dividends (dividends throughout the year as part of monthly withdrawals), you will need to make sure that you have up to date accounting information to support that decision, at the time of the withdrawal.

 

Consequences of paying an 'illegal' dividend
If you pay yourself a dividend when in fact you have made a loss, the money withdrawn will be treated as either a loan from the company or as net salary.
If the company goes into liquidation and the liquidator or administrator reviews your conduct as a director over the three years before insolvency, and finds that you have been paid dividends 'illegally', then you will be expected to repay the amount withdrawn.

 

Declaring the dividend properly
As a director, you can declare the payment of interim dividends, assuming you have profits to support the payment, with no paperwork required.
Final dividends however, need to be declared at a board meeting. You must indicate the fact in the Minutes of the Board Meeting, which becomes part of your company records.

 

Dividend Vouchers
The dividend voucher is a record of the dividend, that is a written record stating that you got the dividend, how much it was, and what shares you own.
The sole purpose of the dividend voucher is to provide a record for you personally. You, as the shareholder of your company, have to have it to support the dividend received figure you show on your personal tax Self-Assessment return. 
Your accountant may prepare the dividend vouchers for you, or you can do it yourself. It doesn't need any special calculations or signatures.

 

Keeping accurate, up to date records of your business is crucial to ensuring that the company is paying you dividends legally. 

Having accurate figures that prove that, at the time the dividend was declared, the company was in profit, does not have to be difficult. You can use this simple calculation:-

Total revenue at the date of declaring the dividend = A

Total Cost of Sale, Expenses and Salary at the date of declaring the dividend = B

Net profit at the date of declaring the dividend (A-B) =  C

Estimated Corporation Tax due on the net profit (C x 20%) =  D

Profit available to declare as a dividend = (C - D)

Ideally you should not take the full profits so there is spare cash for any adjustments that are made at year end.

I hope you found this article useful but if you want further clarification, please do not hesitate to get in touch.

Till next time,

Take care,

Alida

E: alida.ballard@sas-accounts.com

W: www.sas-accounts.com

T: 01932 353146

M: 07595 924644

Back Author : Alida Ballard

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