When can dividends be paid out?
Dividends can only be paid out of a company’s profits, and only if the company’s directors decide to do so. Before any dividends are paid, the company must ensure that it has enough distributable profits to cover the payment. Distributable profits are the company’s accumulated profits that are available for distribution to shareholders after all of its liabilities have been accounted for.
It is important to note that if a company pays a dividend that is not covered by its distributable profits, it can lead to severe legal consequences for the company directors. Therefore, it is crucial that companies follow the rules surrounding the distribution of dividends.
How often can dividends be paid out?
There is no set schedule for paying dividends in the UK, and companies can pay them out at any time as long as they have enough distributable profits to cover the payment. Some companies pay dividends annually, while others pay them quarterly or bi-annually.
However, it is worth noting that a company must maintain a balance between retaining profits for growth and paying dividends to shareholders. A company must not pay excessive dividends at the expense of retaining sufficient funds to meet its future obligations.
Who decides how to calculate dividends?
When a limited company decides to pay dividends to its shareholders, the amount that each shareholder receives is based on the number of shares they hold in the company. For example, if a company has 1,000 shares in issue, and a shareholder owns 100 of those shares, they will receive 10% of the total dividend payment.
The amount paid out in dividends is typically decided by the company’s directors, who will consider a number of factors such as the company’s financial performance, cash reserves, and future growth plans. The directors will then propose a dividend payment to the company’s shareholders, who will need to vote on the proposal at a general meeting.
If the shareholders approve the proposal, the dividend payment will be made to each shareholder based on the number of shares they hold. It is worth noting that if a shareholder owns more than one class of shares in a company, they may be entitled to different dividend payments for each class of share they hold.
What is the tax-free dividend allowance?
Since 2016, there has been a tax-free dividend allowance, allowing you to earn up to the total allowance without paying any tax. Until this year, the tax-free dividend allowance had been £2,000 since 2019. However, this was lowered to £1,000 for the 2023/24 financial year and will fall again to £500 in 2024.
How are dividends taxed in the UK?
Dividends are subject to income tax, but the amount of tax payable depends on the amount of dividend income received and the individual’s total income.
Dividend income above the £1,000 tax-free allowance is then taxed according to your income tax band. Add your total dividend income to the rest of your taxable income to work out your tax band. You will then pay that rate of tax on your dividend income that exceeds the tax-free allowance.
Income Tax Rate
Dividends Tax Rate
£12,571 to £50,270
£50,271 to £125,140
It is worth noting that the tax on dividends is paid through self-assessment, and the responsibility for paying the tax falls on the individual receiving the dividend income, not the company paying the dividend.
In addition to the amount paid out in dividends, shareholders may also benefit from an increase in the value of their shares if the company’s performance improves. This increase in value is known as a capital gain and is subject to capital gains tax if the shareholder sells their shares.
In summary, dividends are a way for limited companies in the UK to distribute profits to their shareholders. Companies can pay dividends at any time as long as they have enough distributable profits to cover the payment. Dividends are subject to income tax, and the tax payable depends on the amount of dividend income received and the individual’s total income.
As always, it is crucial to seek professional advice if you are unsure about the rules and regulations surrounding dividends. We at CIGMA Accounting would be happy to assist you or your business, wherever you may be located in the UK. Fill out the form below and a consultant will be in touch within one business day.
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