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11 December 2018 You are not logged in. Login now.

How to issue a Dividend?

issuing a dividendOne of the reasons many entrepreneurs choose to run their business as a company rather than a sole trader is to reduce the amount of tax they pay on profits they extract from the business. Paying a dividend can be more tax efficient than paying normal PAYE.

It is important to note that a dividend can only be paid when the company has sufficient profits. The directors of the company need to assess the financial position of the company and then make a decision on how much profit will be distributed to the shareholders of the company.

Issuing a dividend

The decision to issue a dividend should be made at a meeting of the directors. A formal record of the meeting should be recorded in a set of meeting minutes. Even if the company only has one director who is also the shareholder a set of meeting minutes must be recorded. This is a formal record of the decision to pay a dividend and HMRC expect these to be kept on record.

The meeting minutes typically record-
  • Name of the limited company issuing the dividend
  • Date the meeting was held
  • People present (even if just a sole director company)
  • Location of the meeting (typically the registered office)
  • Amount of dividend to be issued to each share class
  • Any other business discussed or simply add no other business was discussed

When a dividend is paid a dividend voucher must be issued to all shareholders receiving a payment. This needs to include-
  • Name of the limited company issuing the dividend
  • Shareholders name
  • Shareholders address
  • Number of shares held by the shareholder
  • Amount of tax credit
  • Amount paid to the shareholder
  • Date the dividend was issued
  • One of the company directors must sign the dividend voucher

It is normal practice for the company to keep a copy of the dividend vouchers on record with the meeting minutes. These may be requested by HMRC to prove the payment was a dividend and not salary which would be taxed as PAYE.

For small companies where the directors are the shareholders and actively involved in managing the business paying a dividend and a small salary can be more tax efficient than paying a salary only. It is important that the dividend is issued correctly and we recommend you seek guidance from an accountant, tax advisor or bookkeeper.

This article is provided for information only and is not tax advice. Your personal circumstances must be taken into account when extracting funds from a company.