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What is a dividend?

A dividend is a payment from a limited company’s profits to its shareholders (owners). The amount each shareholder receives will depend on the percentage they own in the company. For example, if two shareholders own 50% each in a company and a £20,000 dividend was declared, then they would receive £10,000 each.

Sufficient profits must be available to declare a dividend meaning a company cannot pay out more in dividends than the amount available from current and previous year’s retained profits.

Shareholders usually need to pay dividend tax on the money that they earn from dividend payments. Read our guide to dividends and tax to learn more.

How to pay a dividend

To pay a dividend a director’s meeting must be held in which the dividend may be declared. Minutes of this meeting must be recorded even if there is only a sole director. The minutes are simply a written record of what happened during the meeting. We’ve created free templates for directors minutes and dividend vouchers. 

When paying out a dividend there is some paperwork that must be undertaken. A dividend voucher must be completed as a record of each dividend payment and must show the following:

Can shareholders waive their dividend?

A shareholder can voluntarily waive entitlement to their share of a dividend. This allows the remaining distributable profits to be divided between the remaining shareholders. It may simply be due to the fact that a shareholder does not want or need the payment.

In small family businesses it may be the case that it is not as tax efficient for every shareholder to receive a dividend as some shareholders may have other sources of income and the dividend would result in them paying higher rate tax. A dividend waiver can offer a solution to this problem but there are issues to be aware of.

When paying dividends, they must be paid at the same rate for each category of share based on the number of shares held.

For example, a company with two shareholders:

100 shares in total. The company has distributable profits of £1,000 and chooses to pay a dividend of £1,000 (£10 per share).

If shareholder A decided to waiver their dividend, it would not be possible to pay Shareholder B more than £400 (£10 per share). This is because if A had not waived their dividend, there would not be sufficient distributable profits to allow the same rate of dividend to be paid on all issued shares.

 
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Potential options which may help with dividend waivers

*The shareholder who does not want the dividend may transfer his/her shares to another shareholder(s) before the dividend is declared. However, this will mean no further involvement in the company and it would be more difficult to reissue shares to them at a later date. This procedure would also require the approval of the Board.

*The shares could be re-categorised into A and B shares with the same rights except for dividends. This would allow the company to declare a dividend on the A share only. The owner of the B shares will not receive dividends for the time being but will still remain involved with the company.

There are some further considerations when a dividend is waived

Read our guide to dividends and taking a salary from your business.

Ask us about our online accounting services for limited companies by calling 020 3355 4047, or getting an instant quote.

About The Author

Karl Bilby

We work very closely with our expert accountants to bring you the latest factually correct tax and accounting news. We also enjoy writing about small business news that we hope you find useful!

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