Author: Chris Neame BFP FCA CA(ANZ)

What is a Dividend?

Q: What exactly does a dividend mean for my limited company?

A: A dividend represents a payment made by your company to its shareholders, typically from the profits earned. It’s a way of distributing earnings back to the shareholders, often reflecting the financial health and success of the business.

The Process and Limits of Paying Dividends

Q: How do we decide on the amount for dividend payments?

A: The directors are responsible for deciding the dividend amount. This decision should be based on the company’s profits and financial stability, ensuring that dividends do not exceed funds available after considering any upcoming payment.

Q: Can dividends be paid at any time?

A: Yes, dividends can be paid regularly, like monthly or quarterly, or as a one-time distribution. However, the timing and frequency should align with the company’s financial ability and strategic planning.

Dividends vs. Salaries/Wages

Q: How do dividends differ from salaries or wages?

A: Dividends are paid out of after-tax profits and are not considered business expenses, unlike salaries or wages. This means they do not reduce your Corporation Tax bill. They’re a way to distribute profit, not a cost of doing business.

Taxation of Dividends in 2024/25

Q: What are the tax implications of receiving dividends in the 2024/25 tax year?

A: The first £500 of dividends is tax-free under the personal dividend allowance. Beyond this, dividends are taxed at varying rates depending on your income bracket: 

• 0% within the Personal Allowance, 
• 8.75% at the Basic Rate, 
• 33.75% at the Higher Rate, and 
• 39.35% at the Additional Rate.

Q: How does my salary as a director affect dividend taxation?

A: Drawing a salary uses up your personal tax allowance. Any dividends received above your salary will be taxed after your personal allowance and any remaining dividend allowance are applied.

Recording and Reporting Dividends

Q: What records do I need to keep regarding dividend payments?

A: For each dividend payment, you should issue a dividend voucher which includes the payment date, company name, shareholders receiving the dividend, and the amount. This serves as formal documentation of the dividend distribution.

Common Questions About Dividends

Q: Are there any changes expected in dividend taxation or allowances?

A: Dividend taxation rates and allowances can change with new government fiscal policies. It’s important to stay updated on the latest tax regulations to ensure compliance and optimal financial planning.

Simplifying Dividend Management

Q: How can I simplify the management and taxation of dividends?

A: Consider engaging a professional accountant or financial advisor. They can help plan your dividend strategy, manage records, and ensure you meet all tax obligations efficiently.

This guide is not intended to provide accounting, tax, legal or business advice. It is provided for information purposes only.

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About Neame & Co 

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