What is a Dividend? A Guide For Business Owners

by | Nov 14, 2019

What is a Dividend? A Guide For Business Owners

Dividends are payments made by a company to its shareholders out of its profits based on the number of shares they own. If you are new to self-employment and chose a limited company as your legal structure of your business you’ll have most likely heard this term. Dividends are one of the most tax-efficient ways of extracting money from your company. To learn more about dividends, here’s everything you need to know: 

  • What is a dividend? 
  • How do dividends work? 
  • Should you pay tax on dividends?
  • Types of dividends
  • How to pay tax on dividends

What is a dividend? 

In a limited company structure where there are many different owners or shareholders, ownership of the company is determined by shares or shares of stock. Successful companies generate profit. If that money isn’t used for expansion then typically this money would be paid to the shareholders. The most common way of paying cash to shareholders is through a dividend.  

How do dividends work? 

Dividends are determined by the company’s performance. Declaring dividends without sufficient profits is illegal. Therefore, the company must be paying dividends from profits generated by the company. 

The amount of dividend payment you will receive by the shareholders will be calculated based on the number of shares they own in the company. For example, if a shareholder owns 50% of the shares of a company, and the company declared a dividend of £10,000, then they would receive £5,000 of dividend.

If you own a company and want to issue a dividend to your shareholders, then you have to hold a meeting of directors to “declare” the dividend. Proper documentation is recommended when doing so. When distributing a dividend, you need to issue a dividend voucher for each dividend payment the company makes containing the following details:

  • The date the dividend is paid
  • Company name
  • Names of the shareholders being paid a dividend
  • Total amount of the dividend

All recipients should keep a  copy of the voucher for the dividend amount and you, as the business owner should keep your own voucher as well for the company’s record. 

Take note that dividends should usually be distributed according to the percentage of company shares owned by each shareholder. If you own 75% of the company’s shares, you should receive 75% of each dividend distribution.

Should you pay tax on dividends?

You only pay tax on dividends that go above your dividend allowance in the tax year. You do not pay tax on dividends from shares in an ISA.

UK dividend allowance

Tax year
Dividend allowance
6 April 2019 to 5 April 2020
£2,000
6 April 2018 to 5 April 2019
£2,000
6 April 2017 to 5 April 2018
£5,000
6 April 2016 to 5 April 2017
£5,000

 

Working out tax on dividends above your allowance

The tax you pay depends on which Income Tax band you are in.

Tax band
Tax rate on dividends over your allowance
Basic rate
7.50%
Higher rate
32.50%
Additional rate
38.10%

Types of dividends

Commonly, dividends are generally distributed in the form of cash to the shareholders of the company. However, that’s not always the case. Here are the other types of dividends available:  

  • Cash dividend
  • Stock dividend
  • Property dividend
  • Scrip dividend
  • Liquidating dividend

 How you pay tax on dividends?

You can only receive a dividend payment if you own shares in a company with sufficient profit. You must pay tax on dividends that are above the dividend allowance in the tax year. 

Unlike PAYE, HMRC are not automatically notified and cannot take tax directly from dividends upon the point of payment (like a salary).

If you earn up to £10,000 dividends in a tax year you can tell HMRC by informing them of your new tax code or by filing a Self Assessment tax return. If you earn over £10,000 dividends you must file a Self Assessment tax return. It is important to register by 5 October following the tax year you had the income. 

You need to ensure you are paying tax as efficiently as possible. If you’d like better financial clarity to ensure you pay the minimum tax possible, book in for a free tax review. We’ll help you focus on making your business more profitable without paying extra in taxes. 

 

 Get FREE TAX Review

 

How can we help?

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Give us a call to speak to us now, or request a call back or fill out our form and a member of our friendly team will get back to you within 24 hours.

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Telephone: +44 20 7183 7288
Email: hello@growfactor.com

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Thank you for reading! Please leave any feedback and comments below. 

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