Dividend payments are sums of money your profitable business can pay out to shareholders in all profitable years. Dividend payments are tax-free, just so long as they are £2,000 or less (for accounting periods from 6 April 2018 onwards). Historically, you could pay dividends up to a maximum of £5,000 for accounting periods that began prior to April 2018.
Reasons to pay shareholder dividends when your business is in profit
Everyone likes the opportunity to benefit from tax-free cash, so paying dividends any time your business is in profit is one way this can happen. Although the maximum dividend payment you can currently make is £2,000, this was only recently reduced from £5,000, so it’s always possible the total could be increased at some point in the future.
Of course, it’s to you to decide on total dividend payments and whether these should be higher than the tax-free limit of £2,000. All payments above this amount will be taxed at your normal rate of tax. Therefore, if you pay yourself a dividend of £3,000 and are a basic rate taxpayer, you will just need to pay tax on £1,000.
Dividend payments need to be recorded correctly by your business. First off, you can’t pay any shareholder dividends unless your business profits can cover them. You need to call a shareholder meeting to announce the payment of dividends, and any company shareholders should receive a payment based on the number of shares they own in the business.
You are required to retain the minutes of this shareholder meeting, even if you are the only director of the company. Dividend vouchers need to be issued for any payments and should be given to each recipient, with a copy retained by the company for future reference.
Your business won’t need to pay any kind of tax on dividends paid, neither will shareholders if the total is kept below the £2,000 threshold.
Get in touch with Cornel Accountants to find out more about tax breaks that could benefit you or your business. We’re expert at offering SMEs the best financial advice for boosting growth and profitability.