{"id":25854,"date":"2016-02-10T09:48:28","date_gmt":"2016-02-10T09:48:28","guid":{"rendered":"https:\/\/www.clearbooks.co.uk\/?p=25854"},"modified":"2016-02-10T09:48:28","modified_gmt":"2016-02-10T09:48:28","slug":"what-is-a-dividend-how-theyre-paid-taxed-and-how-to-create-them","status":"publish","type":"post","link":"https:\/\/www.clearbooks.co.uk\/blog\/what-is-a-dividend-how-theyre-paid-taxed-and-how-to-create-them\/","title":{"rendered":"What is a dividend? How they’re paid, taxed and how to create them"},"content":{"rendered":"

In the previous blog for our ‘Commonly asked accounting questions’ series, we looked at what a creditor and debtor was<\/a>.<\/a> This time we\u2019re focusing on what a dividend is, how you pay them and how you can create them within your Clear Books account.<\/p>\n

What is a dividend?<\/b><\/h1>\n

A dividend is distribution (divvy up) of a limited company\u2019s profits to its shareholders. The profits used are those available after a company has paid all its expenses and Corporation Tax.<\/p>\n

With many small companies being owned and run by one or two people, who are both directors and shareholders, it\u2019s important to differentiate the two roles for this purpose.<\/p>\n

Directors runs the business and will take a salary for that work. \u00a0This is one of the expenses taken out of profits before the company\u2019s tax bill is calculated and can, within reason, be any sum the directors decide is reasonable.<\/p>\n

Shareholders do nothing in the business and wait for the directors to report to them over how the company has done and, as mentioned above, will take their money out of whatever profits are left. \u00a0It\u2019s important to point out that the dividends available are limited by the profits available.<\/p>\n

Dividends are calculated as a whole and then divided up amongst the shareholders according to the proportion of shares they each hold. For example, if a shareholder owns 30% of your company shares, they will receive 30% of each dividend distribution.<\/p>\n

Most large companies pay dividends every 6 or 12 months whereas many small companies will pay them quarterly or monthly.<\/p>\n

How are dividends paid?<\/b><\/h2>\n

To pay a dividend to your shareholders, approved by directors, there are a couple of steps that are necessary to take.<\/p>\n

    \n
  1. Hold a meeting of the directors to decide on what dividend can be paid, recording minutes of the meeting*.<\/li>\n
  2. Pay the dividends (or make them available) to each shareholder and provide them with a voucher as evidence for their tax return.<\/li>\n<\/ol>\n

    *Instead of having to call a meeting, it is also possible for the directors to approve the dividends in a \u201cwritten resolution\u201d, signed by all the directors.<\/strong><\/p>\n

    Dividend tax credits<\/b><\/h2>\n

    As dividends are paid out of the company\u2019s taxed income they have, for decades, been treated as having already been taxed on the shareholder and so come with a \u201ctax credit\u201d.<\/p>\n

    For many years this tax credit has been 10%, i.e if a shareholder receives a dividend of \u00a3900, a tax credit of \u00a3100 is attached so that they are treated as having received a gross dividend of \u00a31,000 on which they have suffered 10% tax, leaving them with \u00a3900 in their pocket.<\/p>\n

    This system is abolished from 6 April 2016 and so a \u00a3900 dividend will represent the shareholder\u2019s gross income.<\/p>\n

    How are dividends taxed?<\/b><\/h2>\n

    Up to 5 April 2016:<\/strong><\/p>\n