Understanding Dividend Pay-outs in UK Limited Companies: A Guide for Shareholders and Directors
For many limited company owners in the UK, distributing company profits effectively is a key consideration. Dividends offer a tax-efficient way to achieve this, but the process of deciding upon and filing these payouts involves specific legal and procedural steps that both shareholders and directors need to understand.
The Role of Directors and Shareholders: A Collaborative Decision
The decision to pay dividends is not solely the prerogative of the directors. While directors manage the day-to-day operations and have a significant say in financial strategy, the ultimate power to declare dividends rests with the shareholders.
Here's a breakdown of their respective roles:
Directors: The Recommendation and Operational Oversight Directors are responsible for assessing the financial health of the company. Before recommending a dividend, they must ensure the company has sufficient "distributable profits." This isn't just about having cash in the bank; it refers to accumulated realized profits, less accumulated realized losses. Essentially, the company must have enough profit to cover the proposed dividend without impairing its capital. Directors will also consider:
Cash flow: Does the company have enough readily available cash to make the payout without jeopardizing ongoing operations or future investments?
Future plans: Are there upcoming expenditures, investments, or unforeseen contingencies that require retaining profits?
Company articles of association: The company's articles may contain specific clauses regarding dividend payments, which directors must adhere to.
Solvency: Directors have a duty to ensure the company remains solvent after the dividend payment. Once satisfied, the directors will propose a dividend payment to the shareholders.
Shareholders: The Power to Declare Shareholders are the ultimate owners of the company and have the authority to declare dividends. This is typically done through an ordinary resolution passed at a general meeting or, more commonly for smaller companies, by written resolution. Shareholders will vote on the dividend proposed by the directors. They can approve the proposed dividend, approve a smaller dividend, or reject it entirely. They cannot, however, declare a dividend higher than that recommended by the directors.
The Process of Declaring and Paying Dividends
Once the directors have recommended a dividend and the shareholders have approved it, the following steps generally occur:
Board Meeting and Resolution: The directors hold a board meeting to propose the dividend. Minutes of this meeting should be kept, detailing the amount per share, the class of shares, and the payment date.
Shareholder Resolution:
Interim Dividends: For interim dividends (paid during the financial year), directors generally have the power to declare these without a shareholder resolution, provided the company's articles of association permit it and they are satisfied there are sufficient distributable profits. However, it's good practice to inform shareholders.
Final Dividends: For final dividends (paid after the financial year-end and often proposed alongside annual accounts), a shareholder ordinary resolution is required. This can be at an Annual General Meeting (AGM) or via a written resolution signed by the requisite percentage of shareholders (usually over 50%).
Dividend Voucher: A dividend voucher must be issued to each shareholder receiving a dividend. This crucial document serves as a record of the payment and must include:
Company name
Shareholder's name
Date of payment
Net dividend amount
Any tax credit (though this is less common now for UK individuals due to changes in dividend taxation)
The total dividend amount
Payment: The company then pays the dividend to the shareholders.
Filing and Tax Implications
Unlike some other company filings, you do not "file" dividend pay-outs with Companies House. Companies House is primarily concerned with statutory information like annual accounts, confirmation statements, and changes to company structure.
However, dividend payments have significant tax implications that must be accounted for and reported to HMRC:
Company Accounts: The dividend payments must be accurately reflected in the company's statutory accounts. These accounts are filed with Companies House (and HMRC).
Corporation Tax: Dividends are paid out of post-tax profits, meaning the company has already paid Corporation Tax on those profits.
Shareholder's Self-Assessment Tax Return: Individual shareholders in the UK are liable to pay tax on dividends received above a certain allowance. These dividends must be declared on their personal Self-Assessment tax return. The dividend voucher is essential for shareholders to complete their tax returns accurately.
No PAYE/National Insurance: Dividends are not subject to PAYE (Pay As You Earn) or National Insurance contributions, making them a tax-efficient way for many owner-managers to extract profits compared to salaries (though this depends on individual circumstances and the level of profits).
Key Considerations and Best Practices
Up-to-Date Accounting: Maintaining accurate and up-to-date accounting records is paramount. This allows directors to clearly determine distributable profits and prevents illegal dividends.
Review Articles of Association: Always check the company's articles of association for any specific clauses or restrictions on dividend payments.
Professional Advice: It is highly recommended to seek advice from an accountant or tax advisor when considering dividend payments. They can provide guidance on distributable profits, tax implications for both the company and individual shareholders, and ensure compliance with all relevant regulations.
Clear Documentation: Keep meticulous records of all board resolutions, shareholder resolutions, and dividend vouchers. This demonstrates good governance and provides an audit trail.
Illegal Dividends: Paying dividends when there are insufficient distributable profits is an "illegal dividend." Directors can be held personally liable to repay these to the company, and it can have serious consequences.
In summary, while the process of paying dividends in a UK limited company might seem straightforward, it requires careful consideration of financial health, adherence to legal requirements, and a clear understanding of the respective roles of directors and shareholders. By following best practices and seeking professional advice, companies can ensure they distribute profits effectively and compliantly.