Restoring Dividends

What is a dividend & dividends versus salary?

Dividends are payments made to the company’s shareholders from the profits of the company. If a company is making profits there are essentially two ways in which those profits can be paid over to the people who own and run the company.

One is for the directors (or others, e.g. family members) to be paid salaries or fees for the work they have done, known as employment income. This will be taxed under the PAYE system. Both the company and the director will also be liable to make National Insurance contributions.

Another way of taking money out of the company is to pay dividends. These are paid to shareholders (rather than directors) and (unless the company has special articles) must be paid in accordance with the rights of the respective shareholders. Dividends are taxable as investment income in the shareholders’ hands. The tax rates for dividends are generally lower than for other sources of income.

Illegal Dividends

It is usually up to the directors of the company to decide if and when a dividend can be paid to the company’s shareholders.

However there are circumstances when a company cannot pay a dividend for example if the profits are simply not available for distribution. Typically a company is in its first year may experience this problem, with the bulk of its capital being used to start the business.

Does the company have sufficient reserves to pay a dividend? This question is one that must be considered before agreeing a dividend payment. A key requirement of the CA 2006 is that companies can only make distributions from profits available for the purpose, i.e. accumulated realised profits, less accumulated realised losses, which equates to ‘reserves’.

Companies which are insolvent will find the liquidator will take a very dim few of a director who authorises a dividend whilst the company is technically insolvent, leading to an illegal dividend having to be repaid to the company.

Another example may be a company limited by guarantees which can’t pay dividends as there is no share capital on which to pay a dividend

Restoring Dividends

In summary there are many business owners who for one reason or another can’t pay themselves a dividend. What you didn’t know is there are ways you can restore the dividend payments to yourself and others.

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