Board meeting for one
Yep, if you are the sole shareholder of your own limited company, you will find yourself holding a board meeting for yourself.
I know it sounds strange but if you want to draw down money from your limited company in the form of dividends, it is a procedure that you have to follow.
This week’s article gives you the low down on taking dividends through a limited company.
What is a dividend?
A dividend is retained profits that can be distributed to shareholders. A retained profit is money that is left in the limited company after you have paid for things like expenses and liabilities and taxes (such as VAT and Corporation Tax).
Freelancers, contractors and consultants who work via their own limited company (and who are not caught up by IR35) choose to take a small salary and the remainder through dividend payments. In the majority of cases, this is the most tax efficient way to operate as National Insurance Contributions are not payable on company dividends.
How to take a dividend
There are certain rules and procedures that you must adhere to even if you are the sole shareholder in the company. As we mentioned at the beginning of this article, you will, in theory, have to hold a board meeting with only you in attendance.
The minutes of this board meeting have to be recorded in the company records.
Dividends must be paid to the shareholders in amounts that match the percentage of the shareholding they own. For example, if you are the sole shareholder, you will own 100%. If there is a second shareholder, you may decide to split this 50/50. In this case, each shareholder will receive 50%.
There is no set time when dividend payments have to be paid. As long as the company is in profit, you, as the limited company director can determine when the dividends can be paid. If you have concerns, please speak to your accountant and they will be happy to advise you on this.
Each shareholder must be issued with a dividend voucher that shows:
- Company name
- Names of the shareholders being paid a dividend
- The further amount
Also, a copy of the dividend voucher must be kept in the company records.
The dividend voucher can be printed and physically given to the shareholder, or, it can be sent electronically (attached to an email).
Either way, we recommend that this is done straight away. If you leave it, it is very easy for it to get forgotten. And, as a company director you have a legal responsibility for making sure that the company paperwork is completed on time.
Tax on dividends
The way that taxes on dividends is worked out changed on 6th April 2016. The old system was replaced with a fixed tax rate. A £5000 ‘dividend allowance’ was also introduced.
The table below shows how dividend income is taxed:
To make it a little easier to understand we have included the following example:
Bini is an Engineering contractor, her personal allowance has been used up by taking a gross salary of £11,000. The remainder of her income is taken in dividends.
She decides to take a dividend of £32,000 which is taxed at 7.5%. However, the ‘dividend allowance’ means the first £5000 is not taxed. Meaning, that £27,000 is taxable at 7.5%.
Dividends that fall into the higher tax band are taxed at 32.5%. Dividends in excess of £150,001 are taxed at the additional rate of 38.1%.
If you would like to discuss this in further detail, please give us a call on 020 8952 2234, and we can discuss your requirements in more depth.
Next week’s article will look at if you need to add a second shareholder and how you can do this.