It is common practice for a director/shareholder of a limited company to be rewarded by a dividend as opposed to a salary. This avoids National Insurance bills for both employer and employee.
You may already reward yourself in this way, but is all your paperwork in order?
Will it survive close examination by the tax office?
Are you sure you are paying the dividend correctly and that the tax inspector cannot argue that the dividends paid are not salary subject to PAYE and National Insurance?
Using the checklist below will avoid unexpected tax bills.
1. Is your dividend legal?
• The Companies Acts say that dividends can only be paid from profits. If you have no profits, you cannot pay dividends.
• ‘Profits’ are after-tax profits and include profits brought forward from an earlier accounting period.
• It is ‘illegal’ to pay dividends if you do not have any profits.
• You need to consider the financial position of the company whenever a dividend is paid. Full accounts are not required for the calculation of an interim dividend but the Revenue says you must have records that enables ‘a reasonable judgement to be made as to the amount of the distributable profits’.
• A dividend that is ‘illegal’ will cause problems if the company goes into liquidation or administration, as the dividend will be treated as a loan and will have to be repaid to the company to repay creditors.
2. Is your dividend properly declared?
• Directors may authorise payment of interim dividends throughout an accounting period. This can be done in writing without the need for a meeting. Final dividends need to be approved by ordinary resolution confirmed by a simple majority of shareholders.
• We are happy to provide copies of the standard text for dividends or we can on request prepare the relevant documentation for you.
3. Dividend payment date
• Interim dividends are paid on the date of payment. This can be subsequently varied or cancelled.
• The Revenue treats the payment of an interim to be made on the date the entry is made in the company records. Please make sure you correctly describe a dividend as a dividend in your accounting records!
• A final dividend is payable on the date of the passing of a resolution or at a later date if specified in the resolution.
• You cannot backdate dividends or documents – this is fraud!
4. Dividend vouchers
• A single dividend tax voucher covering the whole tax year is permissible.
• Dividend vouchers do not have to be presented at the time of payment.
• We can supply a sample dividend voucher.
If you would like to speak to me about this, or any other matter, please feel free to contact me or leave a comment below.