When you make a dividend payment from your limited company you need to ensure that you’ve sufficient funds available to do so. Otherwise the dividend could be “illegal” which could cause a number of issues later down the track.
How to work out your dividend
To establish if you can pay a dividend and how much you can take there are some very simple rules to follow:
Start by working out the company profits
Income less allowable costs = company profit
Then take off the estimated Corporation Tax
The current rate of corporation tax is 19% So profits x 19% = corporation tax
Work out the “Distributable Profits”
The amount left after taking off the corporation tax is what you can take out of the company in dividends. This is known as distributable profits; a term that it’s worth being familiar with.
Quick rule of thumb calculation for distributable profits
After corporation tax at 19% then 81% of profits are distributable as dividends.
To arrive at the amount that you can take out of the business as distributable profits at this point in time you need to add on any Retained Profits brought forward and deduct any dividends taken already this financial year.
The retained profits brought forward will be found in your last set of accounts. This figure will be nil if this is your first year of trading.
You should have a record of your dividends taken to date and they should be shown in your accounting records.
Income less costs = profit
X 19% = Corporation Tax
Profit – Corporation Tax = distributable profits
Distributable profits + Retained Profits brought forward less dividends taken this year = Profits available to take as dividends (Distributable Profits)
Of course if this is a negative figure then you have no available profits to take as a dividend. Any dividend payments at this stage will be illegal.
Clearly to even attempt the above requires your accounting records to be completely up to date. If you are using an accounting system there should be a report available to show your company profits. Some systems even show you the available distributable profits.
Dividends are not like paying a salary; do not fall into a trap of paying out the same amount every month.
General advice used to be to try to pay a dividend on a quarterly basis although in all the time I’ve been in Practice I have yet to see HMRC query monthly dividends. Just avoid setting up a regular payment for the same amount on the same day and make sure you perform a check on “available profits” before you withdraw any dividends.