New Limited Company: 'How Do I Pay Myself?' Part 1 - Dividends

PART 1 - DIVIDENDS

Firstly, congratulations on setting up your new limited company, you may have previously been self employed and decided to move to running as a limited company or you may have set up straight away as a limited company, either way the question of how do you pay yourself is probably on that list of things keeping you awake at night!!

As a limited company you can pay yourself a mix of salary and dividends, and in general a mix is the most tax efficient thing to do. Benefits are also an option to be considered too.

Because this is a big subject, this blog is going to be a 3 part series over July:

  • Part 1 – Dividends
  • Part 2 – Salary
  • Part 3 – Benefits

DIVDENDS

When can I pay them?

This might look like we are starting back to front, but dividends are the easy bit .. there is one key rule …

1.      In order to pay dividends you need to be making a profit

No profit, no dividends .. it also needs to be accumulative profits .. by this I mean that if you have been trading several years and had losses in the past then you need to have had enough profits to “wipe these out” first before you can pay dividends.

But other than that, you can pay them pretty much when you want to .. as long as you are happy that you have the profits.

How do I pay them?

You look at the amount you want to take out of the business as dividends and work out what this is per share that you hold.  So, if you have 100 shares and you want to take out £1,000 that is £10 dividend per share.

You then transfer this cash from your business account to your personal account.

What do I need to document?

Every time you pay a dividend you should record a dividend voucher – this is the formal record that you have paid a dividend from the company to you as the shareholder.

There are templates in our resources area for this.

What if there are other shareholders?

If there are other shareholders then presuming you all hold the same class of share, they you need to pay them the same dividend per share too.

Tax implications?

Dividends come out of the company AFTER corporation tax (from 1 April 2017 this is 19%) so you need to ensure that you are leaving sufficient cash in the business to pay the corporation tax and also for the business to function.

From a personal point, for the 17/18 tax year, the first £5,000 of dividend income is tax free and above this you pay tax at 7.5% (basic rate tax payer .. higher rate tax payer is at 32.5% and an additional rate tax payer is at 38.1%) .. this is paid via your self assessment tax return.

Rachael SavageComment