Drawing formal dividends from a UK company requires adherence to legal requirements under the Companies Act 2006 and good corporate governance practices. Below is a brief now exhaustive process, however you must take qualified legal advice:
1. Confirm Availability of Distributable Profits
- Dividends can only be paid out of distributable profits, which means the company’s accumulated realized profits, after deducting any accumulated realized losses.
- Check the company’s latest audited or unaudited accounts to ensure there are sufficient profits available for distribution.
- Paying dividends without sufficient distributable profits is unlawful and can lead to directors being personally liable to repay the company.
2. Hold a Board Meeting and Declare the Dividend
- The directors must convene a board meeting to formally decide on the payment of dividends.
- During the meeting:
- Review financial statements and confirm distributable profits.
- Agree on the amount of dividend to be paid and the payment date.
- Authorize the preparation of dividend vouchers.
- Document the decision in board minutes as part of the official company records. This is a legal requirement and crucial for transparency.
3. Prepare and Issue Dividend Vouchers
- For every dividend paid, the company must issue a dividend voucher to each shareholder receiving the dividend.
- The voucher should clearly state:
- The name of the company
- The date the dividend was paid
- The name of the shareholder receiving the dividend
- The amount of the dividend paid
- These vouchers serve as evidence of the dividend payment and are useful for shareholder records and tax purposes.
4. Payment of the Dividend
- Dividends can be paid by cheque, bank transfer, or any agreed method.
- The amount paid must be proportionate to the number and class of shares held by the shareholder.
- Ensure payments are made promptly according to the board’s resolution.
5. Record Keeping
- Update the company’s register of members or create a separate dividend register to record:
- The date of the dividend declaration and payment
- The amount of dividend paid per shareholder
- Maintain these records for at least six years as required by law.
- Proper record keeping is essential for audits and possible future inspections by regulatory authorities.
6. Tax and Reporting Considerations
- Dividends are paid out of profits after corporation tax has been accounted for.
- Shareholders must declare dividend income on their personal tax returns.
- The company does not withhold tax on dividends before payment (unlike salary payments).
- Dividends are not subject to National Insurance contributions.
- The company should provide shareholders with the necessary documentation to support their tax reporting.
Summary Checklist:
- ✅ Confirm distributable profits exist
- ✅ Hold a board meeting to approve dividends
- ✅ Issue dividend vouchers to shareholders
- ✅ Pay dividends in accordance with shareholdings
- ✅ Update company dividend registers
- ✅ Ensure shareholders understand their tax obligations
Disclaimer
The information provided here is intended for general guidance only and does not constitute legal or financial advice. Dividend payments are subject to complex legal requirements under the Companies Act 2006 and tax laws, which may vary depending on individual company circumstances. You should consult a qualified accountant, company secretary, or legal professional before declaring or paying dividends to ensure compliance with all applicable laws and regulations. The author and platform disclaim any liability for actions taken based on this information.