One of the questions many limited company owners ask their accountants is how often they can draw down dividends from their companies. Can you declare dividends on a monthly basis, for example?
Dividend frequency is not a problem, but the dividend must be legal
We asked Emily Coltman from FreeAgent to confirm the situation:
“Dividends can be paid as frequently or infrequently as the directors see fit, though they must first check to make sure the company has sufficient profit – not cash – to cover the dividend, and they must bear in mind that corporation tax must come off the profit before dividends are paid.
“If there is not enough profit in the company to cover the dividend, and the company defaults on its other debts, the unpaid creditors can demand that the dividend be paid back by the shareholders in order to meet their bills.
“The dividend must also be properly documented with board minutes and dividend vouchers being issued on a timely basis. Back-dating board minutes and vouchers is not allowed!”
Further dividend information
The following Company Bug guides expand upon the points made above:
1. How to avoid illegal dividends – you must be sure that there is sufficient retained profit in the company to cover the dividend declaration. Failure to do so could result in an HMRC investigation, and penalties.
2. Complete the correct paperwork – you will need to keep board meeting minutes, and provide correctly formatted dividend vouchers to all company shareholders.
3. Paying tax on dividends – dividends are taxed via the annual self-assessment process. A nominal 10% ‘tax credit’ is applied to dividends in order to calculate the taxable amount. Importantly, from April 2016, the way dividends are taxed will be changed significantly. You can find out more here.
How accounting software can help
Rather than relying on your accountant to tell you how much retained profit your company has to distribute, the leading accountancy software packages make life a lot easier these days. For many small business owners, the ability to see exactly how much money is available at any point in time is worth the investment alone.
FreeAgent – which we use every day at Company Bug – can help directors here because it provides a snapshot on the overview screen of the company’s profit and loss, with a projection of corporation tax, so that the directors can check whether there is enough profit in the company to pay out a dividend. It also generates board minutes and vouchers automatically when a payment is explained as a dividend.
There are a growing number of other accountancy software providers out there, just a Google search away, and we strongly recommend taking some time to compare the different systems to make sure you invest in one which provides the features your business needs, and one you feel comfortable with.
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