Dividend

A share of a company's profits paid to its shareholders. The usual way an owner-director takes money out, and it has rules.

What it means

A dividend is a distribution of a company's post-tax profit to its shareholders, in proportion to their shareholding. It is not a business expense — the company pays corporation tax first, and the shareholder then pays dividend tax personally.

Why it matters

For most owner-managed limited companies, the standard arrangement is a small salary plus dividends, because dividends carry no National Insurance. The saving is real and it is also the reason HMRC pays close attention.

It only works if the profits genuinely exist — see retained earnings.

What it looks like in practice

Each dividend needs a decision recorded in a board minute and a dividend voucher for each shareholder showing the date, the company, the amount and the shareholding. Do this at the time.

Dividends must be paid in proportion to shares held, unless you have different share classes set up deliberately for the purpose.

What to watch out for

Paying dividends without reserves — unlawful, and reclassified as salary or a loan with tax and interest.

Assuming the split is always optimal. Dividend tax rates and the dividend allowance change; what was efficient three years ago may not be now.

If you are a company director, taking money out and sorting the paperwork later is the habit that causes almost all of these problems.

Where to get proper advice

Your accountant, annually, as a deliberate salary-versus-dividend review rather than as an assumption carried forward.