What are dividends?
Dividends are a distribution of a company's cumulative profits to its shareholders, as determined by the company's board of directors.
Dividends are paid from the cumulative profits of a company after allowing for corporation tax.
What should I be aware of?
Dividends can be a tax-efficient way of extracting money from a company. For a start, individuals can earn up to £2,000 in dividends in the 2020/21 tax year without paying any personal tax, this figure is over and above an individual's personal allowance of £12,500.
However, company financial statements must show available distributable reserves to enable dividends to be paid. Distributable reserves are, broadly, company profits available for the purpose of distributions.
The last financial statements may have shown healthy reserves, however due to Covid-19, a company's financial position may have deteriorated and immediate future prospects are not good as they had been.
Many companies listed on the FTSE have suspended dividend payments to preserve assets and capital as a result of Covid-19. Covid-19 poses significant issues regarding dividend policy for companies of all sizes and family business are no exception.
Company law requires directors to consider the position from the last financial statements up to the proposed dividend date.
Also, it is the directors' duty to consider future prospects, and whether following the payment of a dividend, the company is still solvent and able to pay its debts as they fall due.
How can we help?
Getting proper advice from the outset will ensure that you obtain support to help you consider and assess your company's ability to pay dividends that can be legally declared and advise on a tax-efficient level of dividends.
What you should do next
If you would like help assessing the level of dividends to be declared, please contact your Critchleys Accountant directly.
First Published 8 February 2021
Last Updated 8 February 2021
8 February 2021
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