Have you ever heard someone mention dividends and wondered what are those? What are dividends?
Well… Let’s see if we can clear things up a little for you!
As Accountants for Amazon Sellers and Ecommerce Businesses, we often help people form new limited companies, so as you can imagine, we get asked this question a lot.
A dividend is a payment from a company to its shareholders, of some (or all) of its profits. Essentially it is the company giving them their “share” of the profits.
Dividends can only be paid from a Limited company and cannot be paid from a Limited Liability Partnership (LLP) or sole trader.
The dividend can only be paid/declared if the company has profits from which it can be paid from (these are known as retained earnings). If money is paid out and the company does not have retained earnings, this payment is usually considered to be a loan from the company…
… If you have taken a loan from your company and not repaid it within 9 months of the company’s fiscal year-end, there may be additional taxes to be paid (known as the section 455 tax charge – this is a more advanced topic that we will talk about another time).
Since company profits are taxed, dividends are actually only paid from post-tax profits.
What tax is charged on the company profits?
The tax paid on the profits that a company makes is known as Corporation Tax. Currently, the corporation tax rate is 19%.
What is the tax on a dividend?
In the UK, when a person receives a dividend they are taxed for receiving it. The tax that they are charged is known as Income Tax.
In the tax year ending 5th April 2019 there is a tax-free dividend allowance of £2,000. This means that the first £2,000 of dividends that a person receives is free from income tax.
After this, people are taxed depending on the tax bracket that they receive dividends in.
The 2018/2019 tax bracket rates for dividends are:
Basic Rate (taxed at 7.5%)
Higher Rate (taxed at 32.5%)
Additional Rate (taxed at 38.1%)
Dividends are usually considered a tax-efficient form of payment. However, this is not as true as it used to be as. The reason for this is, as mentioned above, that before you can receive a dividend it will have first been subject to 19% Corporations Tax.
That being said, dividends are free from national insurance, so are still usually more efficient than taking a salary.
How do you pay a dividend?
Technically, for a dividend to be paid, the directors of a limited company must hold a board meeting and, taking minutes, declare that a dividend has been paid.
If you are running your own business and are the sole shareholder, this is incredibly impractical.
We probably should not be admitting this, but in practical terms, most people do not do this. They simply make a payment from their bank account and reference it “dividend”. They then produce dividend vouchers and board minutes after the fact, usually at the company’s year-end meeting.
How often can dividends be paid?
Dividends can be paid as often as the company directors want, however, as mentioned above, since minutes and dividend vouchers are technically supposed to be produced each time that a dividend is paid, it is usually advisable to keep the number of dividend payments to the maximum of one per month.
Do you have any other questions?
Hopefully, that answers a few questions that you may have about dividends. However, if you have any other questions then please be sure to get in touch with us today.
Accountants for Amazon Sellers
We are Accountants for Amazon Sellers that specialise in working with drop shippers and those that carry out retail/online arbitrage. If you are looking for an accountant in the UK then please get in touch as we would love to work with you. You can see our prices here.
P.S It’s the 5th April. If you haven’t already, make sure you read our article on four things to do before the financial year end to find out what you can do to make tax savings today!