Your main goal of opening a company in the UK should be to make profits, and depending on your corporate goals you may choose different ways to extract your financial earnings. One way is to distribute your profits to shareholders, also referred to as paying out dividends.
That said, why should you consider issuing dividends, and how should you go about doing so?
What Is a Dividend?
Imagine you have a group of friends who helped you with a project for a client, be it preparing slides, doing research, collating material and more. Once the project has been approved, you get a sum of money for the work done. Dividends follow the same theory. Here, the money received from the project refers to your company’s profits for the year and your friends are your shareholders.
In order to thank your friends for the help given, you can choose to distribute a percentage of your earnings to them depending on how much they contributed. Alternatively, you may choose to treat them to a nice meal. In this case, the money paid out to your friends is cash, and a meal can be considered additional stock. Dividends can be paid out as either cash or additional stock.
Simply put, dividends are payments paid by private companies for the shareholders and/or directors or investors for buying the company’s shares or stocks.
What Kind of Companies Can Pay Dividends?
Any company can pay dividends if they have profits left after paying corporation tax. Remember that these dividends must be approved by the shareholders through their voting rights. Of course, your company should keep a major portion of profits for future business activities and corporation tax while allocating the remainder profits to dividend payouts.
Why Do Companies Pay Dividends?
If your company has a known track record of making regular dividend payments, your shareholders may be concerned if you suddenly stop the payouts. Consistent dividend payouts is an aspect investors look for to see how strong a company is, and that the company has confidence about future earrings.
To add on, if you want to maximize your shareholders’ loyalty and retention rate apart from normal company growth, issuing dividends can be a bonus perk to them.
Why Do Some Companies Not Pay Dividends?
Small companies and startups are more likely not to declare dividends to shareholders or investors. This is because smaller companies will most probably not have enough leftover cash flow after reinvesting their profits for company growth. Larger, well-established companies are more likely to pay dividends.
How Do Dividends Work?
A company has the power to choose when to pay dividends. However, the frequency of payments are usually in order with profit announcements, typically quarterly, semi-annually or annually. Companies can choose to pay additional dividends if more profit was made in that year too.
Cash dividends are usually paid using the company’s earnings, and given out on a per-share basis.
If you have 1000 shares in Letterman Corporation, and the company declares a $0.20-per-share dividend, how much will you receive in dividend payout? You will receive $200 as dividends for being an investor of Letterman Corporation.
On the other hand, companies can open the option to give investors additional shares as dividend payouts, on a per-share basis or a percentage.
Letterman Corporation decides to pay a 5% dividend, investors will receive an additional share for every 20 shares they have on hand. They will then not be paid through cash, but will receive more earnings if the company grows in future profit.
What is Dividend Yield?
A dividend yield is what investors look for when choosing a company to invest in.
If Letterman Corporation’s stocks are currently trading at $20 and the company pays out an annual dividend of $1 per share, how much will their dividend yield be?
Letterman Corporation’s dividend yield is five percent ($1/20 x 100).
10 Best Paying Dividend Stocks Across the World
Here are some of the best dividend stocks to look into. For entrepreneurs, consider researching these companies on when and why they pay out dividends.
- Texas Instruments (NASDAQ: TXN)
- Coca-Cola (NYSE:KO)
- Eaton Corp. (NASDAQ: ETN)
- Johnson & Johnson (NYSE:JNJ)
- Target (NYSE:TGT)
- Microsoft (NASDAQ:MSFT)
- Apple (NASDAQ:AAPL)
- JPMorgan Chase & Co. (NYSE: JPM)
- Discover Financial Services (NYSE: DFS)
- Intel Corporation (NASDAQ: INTC)
How Does Your Company Issue a Dividend?
If you have decided that your company will pay dividends for the year, you will need to hold a directors’ meeting to declare the dividend. The meeting must be properly recorded with minute notes. Even if you are the sole director of your limited company, you will still need to “hold” this meeting, even though it would mean just doing up the correct paperwork.
What do you need to prepare?
For every dividend payment your company makes, you are required to issue a dividend voucher to recipients of the dividend amount and also keep a copy for your company’s records.
This dividend voucher should include the following:
- Your company’s name
- Names of the shareholders who are being paid a dividend
- Amount of the dividend paid for each shareholder
- Date the dividend is paid
As usual, dividends should be distributed according to the percentage of the shareholder’s shares on hand. A mistake in this percentage could mean you are overpaying or underpaying a shareholder. For newer companies, it is difficult to keep track and ensure all payments are made correctly.
No matter, here at Osome, we free entrepreneurs from the admin work. We not only help you register your company, we also help with bookkeeping and accounting tasks in the UK, so that you can focus on running your company.
Do You Need To Pay Tax on Dividends Payments?
Well, tax is a complicated matter and while knowing how to less tax is great, there is a fine line between tax avoidance and tax evasion. So, it is important to know when you need to pay tax for your various business operations.
Your company does not need to pay tax on any of the dividends payments issues. However, shareholders who receive dividends may have to pay tax on the dividends they get, based on their personal situations, through the annual self assessment.
An individual in the UK can earn up to £2,000 in dividends in the 2021/22 and 2020/21 tax years, before you have to pay Income tax on your dividends. There is also the personal tax-free allowance of £12,570 in the 2021/22 tax year and £12,500 in the 2020/21 tax year.
So, if you’re the director of a company, you can consider combining dividend payments with a lower salary so that most of your income will be tax free. This is one method to reduce the amount of income tax you, as a company director, need to pay.
How Much Tax Do I Have To Pay on Dividends?
After hitting your personal tax-free allowance and dividend allowance cap, further dividends you receive from any source will be taxed.
Rates for the 2021/2022 tax year:
- Basic rate taxpayers: 7.5%
- Higher rate taxpayers: 32.5%
- Additional rate taxpayers: 38.1%
The rates remain the same as the 2020/2021 tax year.
Dividends can be a pay to increase your shareholder morale and encourage investors to keep holding on to your company’s shares. However, if you’re just starting out, we do not encourage paying dividends when your company is still in the initial growth stage. This can cause unnecessary pressure and lack of cash flow for you to reinvest, making it difficult to maintain the company.
If you need help with accounting for your e-commerce company, get in contact with Osome today!