Dividends in Ltd Company – what are they and whom are they entitled to?

As an owner or co-owner of a Ltd company, you can freely use the dividend. It is an effective way to withdraw money from the company and an appropriate way to optimise tax costs and tax reliefs.

Nevertheless, to fully realise the potential of dividends, it is necessary to understand these issues from scratch. What are dividends, and who is entitled to them? We will try to answer these questions in detail in the article below.

What are dividends?

According to the applicable definition, a dividend is a form of income paid on the obtained capital in limited liability and joint-stock companies. The statutes of a given company result in other regulations regarding their payments, which must comply with the applicable rules.

Dividends are paid to shareholders in the company, and their amount is calculated based on the net profits earned in the previous financial year. This can be obtained both in cash and other assets owned by the company. In addition, they may also be paid when the company shows a loss. Dividends in this place are produced from the profits obtained from previous years.

What is the characteristic of Ltd?

Ltd (otherwise limited company) is a capital company that differs significantly from sole proprietorship and other types of partnerships.

This activity is appropriately constrained by various issues, often involving different business types. It is primarily the limited liability of the company owner for liabilities in the amount of its capital. Its specific counterpart in our country is a limited liability company.

Being the sole shareholder of a Ltd company, you own 100% of the shares, and thus you are entitled to 100% of the dividends from the company. However, if there are several shareholders (or co-owners) in a given company, each of them is partially entitled to dividends resulting from a part of the shares held in percentage terms. One more possibility is that the ownership of shares in the company Ltd is not associated with the possession of dividend rights, which are not eligible here. Then these funds are distributed among the partners who own their rights.

Shareholder, owner and director of a Ltd company – how are they different?

Even if the owner of Ltd is also their director, they are not treated as a sole proprietorship, and they are not obliged to pay contributions typical for this type of enterprise.

The tax-free amount in Great Britain has been raised to £ 12,500, while the NI tax-free amount is £ 8,632, which means that up to this amount, there is no need to pay them. Plus, you don’t pay any tax on paying yourself dividends of up to £ 12,500. Above this amount, however, the regulations are in line with the applicable tax threshold.

However, there is a slight caution. If you are not a resident of this country, you are not subject to tax-exempt amounts, and all dividends received from a company must be taxed in your country. 

Being the sole shareholder of a Ltd company, you do not have to be its director; you can hire someone from outside. The director is a managing person, while the shareholder is the owner or co-owner.

Dividends in Ltd Company – who are entitled to?

In connection with the possibility of paying dividends in Ltd, there are several misconceptions that should be clarified. Being both a shareholder and director of a Ltd company, you will not receive two types of remuneration on this account at the same time, i.e. director’s salary and dividend. You have somewhat limited rights when you perform two roles. Hence, as a director, you are entitled to receive a salary, but you are not entitled to receive a dividend. In turn, as a shareholder in the company, you are entitled to a payment of dividend profit after the end of the year, but you are not entitled to a salary payment. It is possible to pay advances for dividends during the year, but also here, there are individual regulations and provisions in force in this regard.

How to pay out pure profit from a Ltd company? Favourable distribution of finances.

By paying yourself pure profit from the company, being its shareholder, you make dividend payments. As the sole owner or shareholder, you make decisions here on your own, but as a co-owner, it is necessary to make decisions with the other shareholders. What are the possibilities of using the company’s pure profit? You have three solutions at your disposal:

Leaving the profits in the company used to undertake further investment activities,

Payment of all funds in the form of dividends,

Partial payment of dividends and the rest of the finances with the company.

All these options are interesting and allow you to take appropriate tax measures. As a UK resident, you may find that you exceed the cost of your tax-free income when paying dividends. At this point, part of the tax will be subject to a higher tax rate. Therefore, in this case, it is worth considering only a partial dividend payment and leaving the rest of the funds in the company if there is such a possibility here.

When will the payment of all dividends be a win-win? If the income from the director’s salary has not reached the tax-free threshold, then the amount of dividends will not be taxed. Each dividend below £ 37,500 is subject to a tax rate of 7.5%, while any greater amount is required to pay a tax rate of 32.5%. You will also pay higher tax amounts on higher dividend income, oscillating around 38% and more (depending on the amount).

Dividend financial report and documentation – when is it necessary?

A dividend report is required in strictly defined situations. If you as a shareholder pay yourself dividends of up to £ 2,000, you are not required to notify Her Majesty Revenue & Customs. However, if you pay yourself higher amounts over the year, you should contact HMRC to record the amounts listed for your tax returns. Each dividend should be approved and confirmed by submitting the appropriate protocol. Each shareholder should also receive documentation of the dividend received, a copy of which should be filed in the general documentation of the company.

We offer comprehensive Ltd company accounting services to help you manage your financial obligations, including dividend reporting and documentation. Contact us today to ensure your company stays compliant and efficiently managed.