When running a limited company, one of the primary ways through which you can access cash from the business account for personal use is by taking out dividends. This is because, in contrast to running a business as a sole proprietor, the limited company owns all earnings as a separate legal entity.

To take out limited company dividends, you need to follow a formal procedure governed by the Companies Act 2006. To help manage the legal obligations of paying yourself from the business, let's understand everything you need to know about dividends.

What Are Dividends?

A company's dividends are payments made to its shareholders from its profits, and they can only be deducted from the company's distributable profits. The directors of the company decide whether to pay dividends or not.

Also, understanding the ramifications of limited company dividends tax is essential. In the UK, receiving dividends from a limited company entails more than just rewarding shareholders—it also involves abiding by legal requirements and tax laws.

Dividends are classified into interim dividends (based on the company's available profits, they are distributed during the fiscal year) and final dividends (subject to the annual accounts of the company, declared at the financial year end). A limited business may provide cash dividends to its qualified shareholders. Legally, companies are not required to pay dividends at any time.

An owner of a limited company holds the dual status of a shareholder and employee (employed as the company director). This entitles the owner to dividends as a shareholder, as well as a salary as an employee.

If you decide to take a director's pay (the most tax-efficient approach to extract profits from a company is to  frequently take a combination of dividends plus salary), the salary can be paid by the company before the corporation tax of the company is calculated. On the other hand, limited company dividends are not tax deductible and can only be paid out if the company has adequate reserves after all of its liabilities are accounted for.

How Are Dividends Taxed?

Tax on dividends for limited companies in the UK  are paid by shareholders rather than by limited companies that distribute the dividends. Dividends more than GBP 1,000 per year require the filing of a self-assessment tax return. The tax rates for dividends are different from income tax: the basic rate is 8.75%, the higher rate is 33.75%, and the additional rate is 39.35%. To calculate the tax rate, add up all of your income, including dividends, for the tax year.

When Can You Take Out Dividends?

The decision of when to take out dividends is at the discretion of the directors. Regarding the timings for issuing dividend payments, there is no formal regulation. One prerequisite, though, is that there needs to be enough profit to cover it.

This implies that by the conclusion of your business's fiscal year, any dividends given out should be covered by profits earned during the year, net of any incurred expenses and liabilities (such as salaries and taxes). If the company is losing money and has no reserves on hand, it is not allowed to pay out dividends.

How Often You Can Take Out Dividends?

You are permitted to take out dividends as you prefer, provided you continuously fulfil the requirement that the company has sufficient reserves to do so.

Dividends given out periodically during the tax year are known as interim dividends. Final dividends are given yearly once the business has had time to properly evaluate how much profit is available for distribution. They are paid at the conclusion of the tax year.

Note that drawing dividends excessively might trigger an investigation by HM Revenue & Customs (HMRC) if they suspect that you are drawing "disguised salaries." You should also consider that taking out dividends infrequently gives a bad impression to lenders if you are seeking investment.

Steps to Take Out Dividends

Taking out dividends from limited companies involves several steps as follows:

1. Ensure Available Profits

Before declaring dividends, ensure that the limited company has adequate distributable profits while also accounting for implications related to limited company dividends tax. The distributable profits are computed based on the company's accounts after potential liabilities, taxes, and expenditures are deducted.

Moreover, being aware of the tax ramifications guarantees adherence to HMRC guidelines. Consulting with a tax accountant in London will facilitate understanding the tax implications, compliance with tax laws, and tax efficacy.

2. Hold a Board Meeting

It is mandatory to convene a board meeting to propose and approve the declaration of dividends. You must document the board meeting minutes, noting the date and amount of dividends and the shareholders receiving them.

3. Verify the Eligibility of Shareholders

You must ensure that the shareholders to whom you pay dividends must be eligible for such dividend payments. This is because not all shareholders are qualified to receive the same. It is necessary to check if the shareholders have the rightful shares and meet all terms and conditions as stipulated in the Article of Association (AoA) of the limited company.

4. Dividend Vouchers

These vouchers are crucial documents. The vouchers will mention the dividend amount, the name of the limited company, the name of the recipient, and the dividend payment date. Copies of these vouchers must mandatorily be retained for the purpose of company records.

5. Tax Implications

Based on their personal circumstances, shareholders may be liable to tax on their dividend payments. In such cases, where dividends are taxable, the tax rates applied will depend on the tax slab that the particular shareholder will come under.

6. Issue Dividend Payments

Dividends are generally paid via the issue of dividend cheques or by way of a bank transfer. Payments must be paid on the payout date indicated in the dividend declaration.

7. Record Keeping

It is necessary for limited companies to maintain proper records of the dividends paid to eligible shareholders. The records must contain essential information such as minutes of board meetings, dividend vouchers, and dividend payment evidence. Maintaining and retaining such records is essential for the purpose of auditing and compliance.

How Unicorn Accountants Can Help You?

Taking out dividends from a limited company comprises a structured process, tax implications, and legal considerations. By following the above steps, a limited company can ensure that it rewards its shareholders while complying with all applicable laws and regulations. Also, getting advice from an expert tax accountant in London will ensure a seamless dividend distribution process and adherence to the UK tax laws.

Being an expert in the UK tax laws, Unicorn Accountants will assist you in matters related to dividend distribution and other tax solutions.

No matter the size of your limited company, we will offer a variety of services to assist you. Whether you need assistance declaring your dividends on a self-assessment tax return, guidance on how much to take out of your company, or assistance in appropriately drafting your dividend voucher, we take care of everything for you.

For companies that do not have much prior experience in such matters,  we offer tailored advice and guidance that will enable you to take out dividends in the most tax-efficient way.