Dividends and Legally Required Paperwork
Written by Sally Fletcher for plan.it, June 2 2011
A dividend is a payment made to a shareholder(s) of a limited company as a reward for their investment, made from distributable profits of the company. Dividend income is unearned income and is taxed differently from earned income, such as salary, which is subject to PAYE.
Dividends that are paid part way through the company financial year are known as interim dividends and one that is declared at the end of the financial year is known as a final dividend.
Shares
A new incorporated limited company will usually have 1000 authorised shares with a nominal value of £1 which is stated in the memorandum and articles of association. This is the total amount that the company can have in issue at any one time. Issued shares are those that have been allocated to the shareholder. In many one director companies, with just one shareholder, this may often be 2. The shareholder should pay the company for the value of the shares at their nominal value, which are then written on to the balance sheet of the financial accounts. Where no payment has been made, a debit entry for the value will be made to the director's and/or shareholder's loan account.
For tax planning purposes there may be advantages for a spouse to take a shareholding in the company. This needs careful consideration and advice from regulated Chartered Accountants such as plan.it should be sought prior to allocating shares.
Distributable Profit
Distributable profit is made up of, for example:
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Net of VAT Sales Invoice Income (known as turnover) within the company financial year |
£100,000 |
|
Less Expenses and Salaries |
£24,000 |
|
Equals gross profit |
£76,000 |
|
Less corporation tax due at 20% on gross profit |
£15,200 |
|
Equals net profit |
£60,800 |
|
Add any retained profit from previous years |
£22,000 |
|
Total distributable profit |
£82,800 |
As the above example demonstrates, the amount of £82,800 could be distributed to shareholders in proportion of their shareholding. If there were two shareholders, one with 8 shares and the other with 2, the payments would be £66,240 (80%) and £16,560 (20%) respectively.
Dividends can only be raised to the maximum of distributable profit at any given time throughout the financial year; anything above that amount would be an illegal dividend and would need either, repaying back to the company, or alternatively could be classed as a loan from the company which may, then result in a S419 (Section 455 of Corporation Tax Act 2010) claim resulting in further tax due.
In this regard, accounting records should be kept up to date regularly to ensure that there is sufficient distributable profit available before raising a dividend.
Net and Gross Dividends
The amount physically paid to the shareholder represents the net dividend. Payments should be paid separately from salary or expenses.
This net dividend paid, is actually 90% of the gross dividend that is counted as taxable income. This is because there is a notional 10% tax credit attached to the dividend. If for example, a net dividend (either interim or final) of £9,000 has been paid, the gross dividend for income tax purposes would be £10,000 of which £1,000 is the tax credit element. As the net dividend represents 90% of the gross dividend; to find the gross amount simply multiply the net amount by 100/90.
10% Tax Credit
The 10% tax credit element of a dividend is a notional tax credit as no payments are involved, and it is used purely to "gross up" the net dividend for personal tax purposes. If an individual remains in the basic rate tax band, then the notional tax credit covers all dividend tax due.
Higher Rate Tax on Dividends
On dividends paid that form a combination of unearned (dividends) and earned income (salary) up to £42,475* (personal allowances of £7,475 and lower tax threshold of £35,000) in the tax year, then no personal tax will be payable on the dividend/s.
National Insurance Contributions are not payable on dividends.
The higher rate and additional rate of tax due on net dividend income above £42,475 is as follows:
£42,476 - £150,000 the higher rate is 32.5% of which 10% tax credit is deemed to cover the basic rate liability leaving 22.5% due
£150,001 and above the additional rate is 42.5% of which 10% tax credit is deemed to cover the basic rate liability leaving 32.5% due
Any tax due is payable by 31st January following the end of the tax year in which they dividends were paid. It is calculated by filing a self-assessment tax return and payable once you have been issued a statement of account from HMRC.
Dividend Paperwork
Under the Companies Act 2006, it is a legal requirement to prepare board meeting minutes that are signed by (a) / the directors. These can be individual documents or a combined one.
A dividend is resolved as payable as a result of holding a Director's Board Meeting. Minutes should be recorded on paper and retained for inspection by HMRC if requested. A tax credit voucher should be issued to each shareholder declaring the net amount proportional to their shareholding, tax credit amount and gross amount. The voucher should be signed and dated by the Director.
Example of Board meeting minute and voucher
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BOARD MINUTE for XYZ LTD Directors Meeting Held On: Directors Present: Held At: (registered office address) At a meeting of the Directors of the Company held on the above date, it was proposed and resolved to confirm the payments to the shareholders of the Company Dividends in the proportion of their respective £1 shareholdings in the amounts shown below. Dividend Amount: £9,000 Signed: (as Director) Dated: |
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Dividend Voucher
XYZ Ltd Date:
TO: At a board meeting held on date it was resolved that a dividend of £9,000 be distributed for each £1 holding to shareholders. ----------------------------------------------------------------------------------------------------------------------------- Name Shareholding Mr A Contractor 1 ------------------------------------------------------------------------------------------------------------------------------ Net Dividend: £9,000 Tax Credit: £1,000 Gross Dividend: £10,000 Director's signature: Date of Payment: |
Click here for an example of a combined board meeting minute and voucher
It is vital that the minutes and vouchers are recorded each time a dividend is paid. Failure to do so could attract HMRC's attention that could deem the payments as salary instead of dividends, and therefore charge tax and national insurance against them. We can provide these to our clients if requested.
* Represent rates and allowances for the tax year 6th April 2011 to 5th April 2012
This brief is for guidance purposes only. In all cases we would recommend that you discuss any queries with professional advisers. plan.it Services is a firm of Chartered Accountants regulated by the Institute of Chartered Accountants in England and Wales. Please feel free to contact us if you have any questions relating to this article or other accounting issues affecting contractors.
