Dividends are a type of distribution of company assets paid to its shareholders. It normally takes the form of cash payments which reflect a certain proportion of annual profits. Each shareholder generally receives a portion of the overall dividend which corresponds to their level of shareholding.
In the UK, company directors sometimes take dividends instead of drawing a salary, for tax efficiency purposes.
Dividends paid to director shareholders are subject to tax (although the rates are different to taxation on salary payments).
But a director's loan is not considered to be a payment in the same way as a dividend - and tax may not need to be paid (depending on the arrangements). For further information, read Directors loans.
Rules relating to the payment of dividends are set out in the Company Taxation Manual. The manual states that dividend payments are unlawful if there are insufficient company profits to cover the amounts paid. So company directors should establish that there have been sufficient profits prior to agreeing on any dividend payments.
Furthermore, any dividends payments must follow the correct procedure (see below).
The procedure for paying dividends is normally set out in the company's Articles of association. Reference should also be made to any relevant provisions contained in a Shareholders' agreement.
As a general rule, interim dividends (ie those paid during the course of the financial year) may be approved by the board of directors - but a final dividend (ie those paid at the end of a financial year) normally requires approval by shareholders by way of an ordinary resolution (ie a majority of shareholders need to agree on a decision). Dividend vouchers must be issued to all shareholders who receive a dividend. Furthermore, public companies must properly prepare interim accounts and file these with Companies House prior to the distribution of any interim dividends.
There is a dividend allowance of £2,000 which means that dividends paid up to this amount in any tax year are tax free. Above this allowance, tax must be paid on any dividends received according to the income tax bracket of the individual, as follows:
Dividends which fall within the income tax personal allowance do not count towards the dividend allowance.
To work out your tax band, add your total dividend income to your other income. You may pay tax at more than one rate.
Unless stated otherwise in the articles of association or shareholders agreement, there is no minimum level of dividend which must be paid. However, the maximum amount of dividends paid must not exceed the profits available.
For more information on dividends, see the Company Taxation Manual.