When Dividends can be Voted
Dividends
Dividends are a return to shareholders on the profits after tax that a trading company has in its annual financial statements and the board of directors approve the amount of dividends to the shareholders.
In a private limited company these could the same people especially startup companies.
Payment of Dividends
Dividends is small private companies are normally voted quarterly but larger companies may only vote these twice a year (Public Limited Companies).
Dividends Paid
How much is the dividend will depend on the on how what level of profit is made the in the financial period so for quarterly dividend it will be how much profit after tax in made e.g. January to March.
Dividends are paid on the amount of profit after the company has paid its tax, the board of directors will determine how much dividends will be, and the following points have to be considered:
- How much cash does the company have.
- What cash does the company need to pay for future projects.
- Wages for the team need to be paid, how much will these be.
- What does the future trading look like.
Can Dividends be Paid when the Company Makes a Loss
Dividends can still be voted even if the company makes a loss for the period as this will depend on the retained earnings on the balance sheet.
If there are retained earning where in previous years not all profit has been paid out in dividends, then then dividends can be voted/paid.
If there are no retained earnings on the balance sheet, then dividends cannot be paid as you cannot have negative retained earnings.
If director/shareholders have still taken money out of the company when there is no retained earnings then these must be allocated to a directors loan account.
Directors Loan Account
If a director has an overdue director’s loan accounts (negative balance) then extra tax is due on the company and the director.
The company will pay corporation tax at the rate of 33.75% on the overdrawn balance in with its corporation tax and this is much higher than the corporation tax at 25%.
If the director/shareholder has on overdrawn loan of more than £10,000 for the year then a benefit in kind will arise and the company must produce and submit a P11D form to HM Revenue & Customs and pay the tax on this.
The director/shareholder’s P11D form will need to go onto his self-assessment tax return and this will be added to his taxable earning form his employment and extra tax may be due especially if it moves from basic rate band (20%) into higher rate band (40%).
If you need help or want more information on VAT registration, please contact us:
Call 07795 425032