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What Do I Need To Know About Dividends?

Dividends are a sum of money that limited companies can pay out to their shareholders.

Limited companies aren’t obligated to pay dividends to their shareholders and are only allowed to make payments if they have enough profit left after paying their Corporation Tax.

What is a dividend?

We’ve already covered this above, but let’s have a look in some more detail.

If a company has made a profit, it can share this profit among its shareholders. The company can only make the payment if there is enough profit after Corporation Tax has been paid to HMRC.

The dividend payment will have to be decided by the board of directors and requires the shareholders’ approval.

A company is not obligated to pay a dividend to the shareholders.

Why do companies choose to pay dividends?

Large, stable companies that generate a lot of money may not need to invest their profits back into the company. When this is the case, they often choose to pay dividends to their shareholders rather than hold onto the money.

If companies have healthy dividend options, it can help attract investors, increasing share prices. If your dividend options are healthy enough, you can earn loyalty from shareholders who are looking to boost their returns after a few years.

Is there any paperwork to be aware of?

Each time a company makes a dividend payment, it will have to write a dividend voucher that shows the:

  • Date
  • Company name
  • Names of any shareholders receiving a dividend
  • Amount of the dividend

How are dividends calculated?

Take the example of a small company. 

This company makes £1,000 profit in its current year.

As well as this, it has £8,000 saved from previous years, they have already paid Corporation Tax on this amount.

Corporation Tax (currently 19%) needs to be paid on the £1,000 for the current year. After this, they have £810, which can be added to the £8,000 from previous years.

The total of £8,810 can be used for dividend payments.

Are there important dates to know about?

There are four important dates you will need to know and record when making dividend payments.

  1. Declaration Date - This is the day the board reveals it intends to pay a dividend.
  2. Ex-dividend date - This is the date investors must buy their dividends by to qualify for the upcoming dividend.
  3. Record date - This is the date the company uses to determine which shareholders are entitled to the dividend.
  4. Payment date - This is the date the dividend is paid and appears in the shareholders’ account. This date is one month after the record date.
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