Making dividend payments to shareholders is a common way of distributing the profit a company has made during the year, or from retained profits from previous years. In this article I'll try to give an overview of how dividend payments can be made.
Dividends are a common way of remunerating shareholders of a business. There may be interim dividend payments as well as a final dividend payment,
and the company must have made sufficient profit for the dividend(s) to be paid.
How Much Can be Paid Out to Shareholders in the Form of Dividends?
If a business turned over £100,000 in a particular financial year, and the costs (salaries, expenses, etc) of running the business amounted to, say, £50,000, the amount of corporation (business) tax owed would be £10,500 (using 21% as the corporation tax rate).
This would leave £39,500 available for dividends. If there were ten shareholders in the business, and they all owned the same number and type of shares, they would each receive £3,950 in dividend payments if all the available money was used.
Dividends are paid per share, so the more shares you own, the greater your dividend payment will be (when compared with another shareholder of the same type in the same company).
What is a Dividend Tax Voucher?
When a dividend payment is made, a tax voucher must be raised and issued to the shareholder. This is normally done by post. This shows the size of the dividend, and the amount of tax credit. The tax credit shows the amount of tax paid by the company on behalf of the shareholder. Dividends are paid after tax (at the basic rate) has been deducted. If you are a higher rate tax payer, you may well have additional tax to pay on the dividends you have received.
Dividend payments can be taken out of company profits after corporation tax has been paid. For example:
Turnover = £100,000
Salaries and other running costs and expenses = £30,000
Net Profit = £70,000 (£100,000 - £30,000)
Corporation Tax = £14,700 (21% of £70,000)
Amount Available for Dividend Payment(s) = £55,300 (£70,000 - £14,700)
Dividend Tax Credits
To prevent double taxation (where both corporation tax and income tax are charged on the same profits), the dividend received carries a tax credit. This effectively states that the net dividend has been taxed at the basic rate of taxation.
This means you don't pay any further tax on your income if you are a basic rate tax payer - your taxable income is less than the higher rate tax threshold (about £36,000)
How Much Is The Tax Credit?
The tax credit is 10% of the gross dividend.
The dividend paid to shareholders is the net dividend.
With reference to the above example:
The net dividend payment is £55,300.
Therefore, the gross dividend is £55,300 x 1.111111 = £61,444.44.
Therefore, the tax credit is £6,144.44 (£61,444.44 - £55,300).
If you are a basic rate tax payer, you pay 10% of the gross dividend in tax, which is considered already paid via the tax credit. Therefore, you have no more tax to pay.
If you are a higher rate tax payer, you will be charged tax at the rate of 32.5% of the gross dividend in tax.
For our example, this is 32.5% of £61,444, which equals £19,969.44.
From this figure you need to deduct the tax credit of £6,144.44.
£19,969.44 - £6,144.44 = £13,825.
This equates to 25% of the net dividend of £55,300.
Please note that the percentages quoted in the above examples will almost certainly change over time, so just insert the current percentages when making your calculations.
