One of the main forms of remuneration for limited company business owners is the dividends that they are awarded from their business. The following is a brief guide to dividends and tax.
What is a dividend?
A dividend is a payment made by a limited company to its shareholders. When a company earns a profit, it can either re-invest it in the business (called retained earnings / reserves), or it can distribute it to shareholders. A dividend is allocated as a fixed amount per share, with shareholders receiving a dividend in proportion to their shareholding.
How is a dividend awarded?
A dividend can only be rewarded to shareholders if there is profit in the business. It is essential to keep up to date management accounts so that you know if you can legitimately award dividends or not.
A board meeting of directors should be held to discuss whether dividends should be awarded or not. If the board agrees that dividends are to be awarded, board minutes should be taken.
When the dividend is issued to the shareholder a dividend voucher should accompany it. A dividend may be paid to a shareholder or in some circumstances may be credited to their director’s loan account.