What is a dividend? Well, simply put, it’s a portion of a company’s profits distributed to its shareholders.
For example, let’s say a company makes a net profit of £40,000 in its first year. After paying £7,600 in corporation tax, the remaining profit of £32,400 is available for distribution as dividends.
If a dividend isn’t declared, the profit carries over to the next year, accumulating as ‘Retained Earnings.’
How are dividends declared?
The company’s board reviews available profits and agrees to declare dividends. Each shareholder receives a dividend voucher confirming their share of the dividend.
For multiple shareholders, dividends are distributed according to their shareholdings. For instance, if a £30,000 dividend is declared and Mr X owns 30% of the shares while Mrs Z owns 70%, Mr X receives £9,000, and Mrs Z receives £21,000.
Tax on dividends: Shareholders must report dividends in their personal tax returns. The tax rates are outlined accordingly.
What to watch out for: Avoid over-distributing profits. If your company pays out more than its available profit, the excess amount becomes an overdrawn Director’s loan, which has tax implications.
In summary, dividends are a way for shareholders to share in a company’s profits, but it’s essential to manage them responsibly to avoid tax issues.
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The Team at London Accountants
