More and more small businesses and freelancers are deciding to trade through a company because of the tax savings, and because frankly it looks a lot more impressive. (for more on this have a look at my earlier post on the Art of Freelancing). It’s pretty easy setting up a company these days, it takes about 15 minutes on the Companies House website, and once you’ve got your new company and your company bank account you’re ready to start invoicing and making some money. So far, so good you’re thinking, it doesn’t seem any different to how things operated when you were just a humble sole trader, and you wonder why you didn’t do this sooner. But then you get to the point a couple of months in when you’re got a bit of money sitting in the company bank account and you want to take more than the £650 a month salary that your accountant told you to pay yourself. You remember something about taking the rest as dividends as there is less tax that way, but you’re pretty vague on exactly how you do that. So for the benefit of all you new company directors, I’m going to walk you through the process –
1. Check Reserves – Make sure you have actually have sufficient reserves to pay a dividend. Reserves are in the simplest term the difference between the assets and liabilities of the company. So for example if you’ve been trading for 3 months, you have £10,000 in the bank, have £5,000 owed to you by a client, but owe an estimated £8,000 to various creditors your reserves would be £7,000. A common assumption is to look at your bank balance and equate that to your reserves, however this doesn’t factor in things like corporation tax, VAT and other long term liabilities. If you use Freeagent then they rather handily give you a reasonably accurate running figure for your reserves on the dashboard. If in doubt, it’s always a good idea to check in with your accountant. If you do end up paying dividends in excess of your reserves then HMRC could come along later and make you repay them to the company or charge you extra tax, neither is a good thing.
2. Do the Paperwork – Decide how much you are going to pay and do the paperwork. Dividends are paid per share, so if the company has 100 shares, and you want to pay out £5,000 that’s a dividend of £50 per share. You need to prepare a interim dividend resolution, with the appropriate dates and amounts and then sign it and keep it somewhere safe. If you use Freeagent they prepare the resolutions for you, have a look in the My Money tab, in dividends, click on any dividends paid will bring up the resolution, which you then need to print off and sign. If you don’t use Freeagent or want to know what one looks like, here’s a link to a template dividend resolution
3. Pay the dividend – this is simply a matter of transferring an amount equal to the dividend from the company bank account into your personal account and making a note in your records that this payment is a dividend. One thing to remember though, if you are not the sole shareholder, say you own 80 of the shares and your brother the other 20, you need to pay him his share as well.
That’s essentially it. I have deliberately keep things simple as this is Dividend Payment 101, but advanced classes will cover the really clever stuff like “declaring dividends but not actually taking them” and “optimising timing of dividend payments for tax planning”. If in doubt, as always, ask an accountant.