There are many benefits to setting up a limited company. From the freedom of being your own boss and the ability to take more control of your career, you could be forgiven for thinking the list is endless.
Another perk you’ll enjoy as a company director is the chance to pay yourself a mixture of salary and dividends – reducing the amount of tax you’ll pay. Sounds good, doesn’t it?
But what’s it all about? How often should you share dividends? To help make sense of it all, we’ve created this quick guide.
What are dividends?
Put simply, dividends are a way of taking profit from your company. There are two types you should be aware of:
- Interim dividends – these can be paid at various points during the financial year
- Final dividends – these are final ‘catch up’ payments made at the end of the financial year
How often can I make a payment?
This really depends on the amount of cash held by your company. You’ll also have to consider relevant legislation that governs how dividends are paid. For example, the Companies Act states that you should have sufficient money (or distributive profit to give it its full name) to cover any dividend payments.
If you try to draw a dividend when there isn’t enough profit in your company, it’s considered to be illegal – or ‘ultra vires’ if you want to get technical. These payments will be treated as void by HMRC and you may have to pay costly fines or even face prosecution.
You could also see your payments classed as employment income, meaning they’ll be liable for higher taxation. If all this seems confusing, it might be worth speaking to an expert accountant, such as ourselves, for assistance.
How do I share dividends to shareholders?
Dividends are paid based on the proportion of shares a person holds in your company. So if you’re the only one, you’ll get 100% of the dividends – it’s as simple as that.
All companies must hold a board meeting with shareholders in order to agree dividend payments. Of course, if you’re the only one, you don’t have to hold a meeting with yourself – unless you really want to!
Shareholders should also be provided with a dividend voucher – even if you’re the only one. Each voucher needs to contain the following information:
- Company name
- Name and address of the recipient
- Number of shares held
- Net dividend payment
- Director’s signature
We hope we’ve been able to shed some light on dividend payments. If you’d like to know how they are taxed by HMRC, please click here.
Why ClearSky Contractor Accounting?
At ClearSky Contractor Accounting, we understand that you’ll want to make the most of your hard-earned cash. That’s why we have our dedicated team of experts on hand to offer expert advice based on your own personal circumstances.
We’re with you all the way through your contracting career, whenever you need us. With extended opening hours, it means we can fit in around your busy WorkStyle.