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Calculating and Paying Dividends
If you plan to pay dividends to yourself through your contractor limited company you must ensure that the dividend is legal. Where proper dividend payment procedures have not been followed the HM Revenue and Customs could argue that payments were not in fact dividends. This could mean you’re forced to pay employed levels of Class 1 employer’s and employee’s national insurance on disputed dividend payments.When paying dividends you must ensure that two documents are prepared:
- Company Board Minute
- Dividend Voucher
When can Dividends be paid?
The regularity with which dividends are paid is up to you. Many freelance contractors take dividends on a quarterly basis but there is nothing to stop you from paying dividends monthly. The important thing to ensure is that the dividend is legal (Company Board Minute and Dividend Voucher accompany the payment) and that the dividend is paid after Corporation Tax has been considered.You should think about leaving a balance in the company for further distribution at a later date as this may give you greater options with regard to tax planning. It is a good idea to only take money that you actually need from the company on a month by month or quarterly basis.
Calculating Dividends
A Dividend is a distribution of profit to Limited Company Shareholders.The level of profit a company makes depends upon sales income received and expenses incurred, this is profit before tax. Once profit before tax is known Corporation Tax can be applied.
Limited Companies run by freelance contractors are normally subject to the small companies’ corporation tax rate as they usually have annual profits of less than £300,000. Currently the small companies’ corporation tax rate is 20% but this is due to rise to 21% in 2009/2010. Once corporation tax has been applied a company is left with profit after tax which can be distributed to shareholders.
Company Board Minutes
For freelance contractors board minutes are normally prepared by an accountant and once prepared payment should be made the same day. Company board minutes should state:- Company Name & Address
- Year end date
- Date on which the meeting was held
- Date the dividend was paid
- Total dividend paid to shareholders
Company board minutes should be signed by the director or company secretary and filed for safekeeping.
Dividend Voucher
Dividend Vouchers are given to Limited Company shareholders once a dividend payment is made. The Dividend Voucher informs the shareholder of the net dividend paid and tax credit. Dividend Vouchers should state:- Company Name & Address
- Name and address of shareholder
- Dividend payment date
- Shares held by the shareholder
- Gross Dividend and Tax Credit paid
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