This Content Was Last Updated on March 16, 2023 by Jessica Garbett
There are a few housekeeping considerations when paying dividends:
Dividends are a share of the company’s profit, payable to its shareholders. As this description suggests, there has to be profit for dividends to be available. As soon as a dividend is paid it is deemed to have been declared. Before declaring a dividend therefore, you must check that the company has sufficient post tax profit to cover the distribution; this can be a relatively informal calculation based on assets less liabilities, including tax accrued to date.
Before declaring a dividend you should evidence that you have considered the viability of such a distribution, as covered above, and you should record the decision to pay a dividend. This would normally be done by producing minutes of a Board meeting, held to discuss and agree on such company matters, however these do not need to be overly formal – a simple note which records the company’s “state of play” immediately prior to the decision to pay a dividend, and a simple calculation which proves that the dividend is “affordable”, alongside the boards authorisation will suffice, and should be retained. We’ve provided a template below.
Once a year the Board should meet to approve the annual accounts, agree the final dividend (if applicable), and note company plans for the coming year. A simple minute is all that is needed. We’ve provided a template below. If the board consists of just one individual, then common sense should prevail, and simple minuted notes of the considerations made should suffice.
It is good practice to prepare dividend vouchers for each payment – template below.
By convention dividends were always referred to in their net amount, but for tax purposes they were grossed up by way of a tax credit, which worked to give the shareholders credit for company corporation tax paid. From April 2016 dividend tax credits are abolished, and the dividend paid is the dividend declared ie no gross/tax credit/net any longer.