Declaring a Valid Dividend
As we have previously reported in Muras Matters the rate of tax on dividends is due to increase from 6 April 2016. Shareholders may wish to consider declaring a dividend before this date in order to benefit from the lower tax rates.
We would point out however that this may not be beneficial in all cases and therefore we strongly recommend taking advice before doing so.
If however ‘accelerating’ a dividend is right for you we thought it would be useful to set out the requirements for declaring a valid dividend to ensure it cannot be challenged by HM Revenue & Customs in the future.
The following rates of tax will apply to dividend income over and above the £5,000 tax free dividend allowance:
|New dividend rate from 6 April 2016||Current effective rate 2015/16|
|Basic rate of income tax:||7.5%||Nil|
|Higher rate of income tax:||32.5%||25%|
|Additional rate of income tax:||38.1%||30.6%|
Declaring a dividend
Certain criteria must be met to ensure a dividend is valid, as follows:
- Distributable profits – the company must have sufficient profits built up to be able to declare a dividend.
- Procedure – the company must follow procedure in order for the dividend to be valid. As a minimum, this will involve a meeting of the directors and minutes of the meeting should be kept. The directors may be able to declare an interim dividend which has fewer formal requirements. A final dividend may require a meeting of the shareholders to pass an ordinary resolution.
- Dividend vouchers – a voucher should be prepared for each dividend payment. We recommend that the voucher includes the date, the company’s name, the company’s registered number, the type of share (e.g. ordinary), the number of shares held, the name and address of the shareholder in question, the amount of the dividend, the dividend credit and a signature of an officer of the company (a director or company secretary).
- Payment – the date of payment is vital in establishing which tax year the dividend will fall into. Dividends are treated as paid when an enforceable debt is created. A final dividend which does not specify the date of payment creates an immediately enforceable debt; if a future date is specified then the debt only becomes enforceable on that date.
An interim dividend does not create an enforceable debt until it is paid, as it can be varied or rescinded at any time until paid. Payment includes the date a cheque is issued. If the dividend is being allocated to the directors loan account in the company, it is only considered to be paid once the accounting entries have been made in the company’s accounting records.
If you are unsure if it is beneficial to declare a dividend in 2015/16 rather than after 6 April 2016, or if you have questions over the procedure for declaring a valid dividend, then please contact our Tax Director, Jenny Marks.
To see our other news items please visit our Muras Baker Jones – Blog.