Dividends

Man and woman using a computer discussing dividends in a office environment.

What Exactly Are Dividends?

Dividends are what shareholders receive as a return for their investment in a business. Let’s assume your company uses a standard set of Articles of Association (the legal rules for running your company). If so, then dividends must be paid in proportion to the number of shares each shareholder owns.

We are frequently asked whether it’s possible to pay one shareholder a different dividend to another. This requires a legally valid share structure, supported by the company’s governing documents. Getting it right from the outset is the gold standard. So we make sure it’s in place when we incorporate your company for you.

If you become a client of ours after you have already incorporated your company, all is not lost. We can advise on restructuring your share capital and help you make the necessary legal changes.

We’re also often asked whether a shareholder can waive their right to receive a dividend. This is a reserved legal activity that most accountants aren’t permitted to carry out. Over the years, we’ve built a network of trusted professionals that we work with. We can therefore recommend a solicitor who can prepare the deed required to waive a dividend.

The Companies Act

The Companies Act sets out when and how dividends can be declared. Most importantly, it includes strict rules on how much can be paid, based on the company’s available reserves. If those rules aren’t followed, dividends may be challenged, reclassified, or even required to be repaid.

Business owners who are both directors and shareholders have flexibility in how they extract income from the business. Dividends are often a part of that mix. But if they’re not declared and documented properly, they may be treated as salary instead. This will likely have tax and National Insurance consequences.

We can help your company to design Compensation Strategies that reward key personnel in a fair, efficient, and lawful way. But, whether or not we’ve helped shape the structure, we make sure any dividends declared are done so in full compliance with company law.

This is What We Do:

  1. Calculate the reserves available for distribution, including a corporation tax estimate
  2. Consult with directors on the value and timing of dividends
  3. Prepare dividend vouchers, board minutes or company resolutions, and send them for approval
  4. Issue dividend vouchers to shareholders who are personal clients
  5. Post the accounting entries to reflect the dividends in the company’s records

You can have the most carefully designed corporate structure — but without solid compliance, it won’t stand up to scrutiny.

What Happens if a Dividend is Reclassified?

This can happen if there aren’t sufficient reserves or if the correct legal process has not been followed. These are a few of the consequences:

  1. You may pay more tax because earnings (wages to you and me) are taxed at higher rates than dividends
  2. You and the company may have to pay National Insurance which is not payable on dividends
  3. You could end up with an overdrawn Director’s Loan Account. (When mismanaged this can be a world of pain for both directors and shareholders). In this event, you could be required to repay your dividends

Declaring dividends isn’t just a formality. It requires careful judgement, an understanding of company law, and a clear grasp of the accounts and tax rules. We apply all of that, so what’s declared can be relied on by directors, shareholders, and by HMRC.