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Dividends and distributions

| Duncan & Toplis | 24 November 2020

Allocating dividends among shareholders is an effective way to extract profits while reducing liability for individual shareholders and the business as a whole.

A dividend payment is a return on investment to shareholders and can be an alternative to a payroll salary, which is subject to the usual tax bands. For many companies, combining dividend payments with low monthly salaries will attract the lowest overall tax liability.

For people in business with their spouse, it’s a good idea to get advice on how dividends can be paid to a husband or wife who is active in the company to really make the most of tax relief.

It’s not uncommon for wives and husbands of shareholders to also sit on the board as a director and shareholder in their own right. By making the most of the second spouse’s personal allowance, lower rate tax bands and dividend allowance, the tax benefits may be effectively doubled if the spouse has no other form of income. 

Getting the balance right between salary and dividends is crucial so seeking advice from a professional is the best way to remain tax compliant. There is no ‘one size fits all’ method, but when done right, dividend payments can make the most of any business' profit. 

Distributions

Company distributions enable shareholders to extract value from their business and can be a more tax-efficient way to receive an income. The rules and regulations are set out in the Companies Act 2006 to ensure that value cannot be extracted in a way that would be detrimental to the company’s creditors.

There are many types of distributions, including dividends, and a company must have sufficient profits available plus annual accounts to justify the distributions in order to make payment.

Seeking professional advice can ensure that distributions are being correctly made and are in line with legislation, as shareholders will be liable to repay any unlawful distributions.

 

If you're looking for advice on the most tax-efficient way to extract payments from the business, please contact our team to discuss your options.

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