When it comes to paying dividends to shareholders, the first thing a company’s directors should do is to check how much profit is available to be distributed. But what happens if you have overpaid dividends?
Thanks to Louisa Drewett from Aardvark Accounting for answering our questions.
How do you know how much money can be paid as dividends at any one time?
We’ll go back to basics and start from the beginning. If you are considering making a dividend declaration on behalf of your company, you always need to consider what funds are actually available – and this requires a simple calculation – as follows:
Net Turnover (gross invoices, less VAT paid to HMRC) minus Expenses (such as salary, accountancy fees, travel & subsistence, subscriptions, computer consumables, etc).
This sum will provide you with the pre-tax profit figure. However, before paying dividends, you need to consider the company’s tax liabilities first, therefore deduct 19% for Corporation Tax. Once you have deducted the taxes due, this will give you the profit after tax figure.
Here is a simple example:
| Net Turnover | £15,000 | |
| Less Expenses: | ||
| Salary | £2,040 | |
| Travel & Subsistence | £1,310 | |
| Computer Consumables | £500 | |
| Accountancy | £100 | |
| Total Expenses | £3,950 | |
| Profit before Tax | £11,050 | |
| Corporation Tax @ 19% | £2,100 | |
| Profit after Tax (available for dividend distribution) | £8,950 |
In the above scenario, there are £8,950 of profits available to be distributed to the shareholders.
Is there a penalty if you take more dividends than profit available?
There isn’t a penalty as such… However, as a director, you should be aware of what profits are available to distribute to the shareholders of the company. If dividends are taken in excess of available profits, these are usually known as ‘illegal dividends’.
You won’t be slapped in handcuffs but it’s not advisable to keep ‘illegal dividends’ within the accounts and these can simply be corrected.
How can you correct overpaid dividends in your accounts?
Any excess dividends should be treated as loans to shareholders, which will then need to be repaid. Assuming that the shareholder that has the excess dividend is also a director of the company, then directors’ loan account benefit in kind implications will also need to be considered.
Providing all loans are less than £10,000 in the tax year and repaid within 9 months of the year-end, no benefit in kind or s455 charges will apply. However, if the loan exceeds £10,000 at any point in the tax year and this loan was provided either interest-free or below the official rate of interest, benefit in kind implications will apply.
If the loan still remains outstanding more than 9 months after the company year-end then s455 charges will apply to the remaining balance. The charge would be in addition to corporation tax and charged at 32.5% of the outstanding loan balance.
If the shareholder is not a director in the company, they may only be required to repay an illegal dividend if they know or have reasonable grounds for knowing that it was made illegally when the distribution was made.
To make sure you don’t get yourself into any sticky situations during the year, it’s worthwhile either preparing management accounts or using software that shows a ‘real-time’ position of your company so you make sure to set enough aside for taxes and review the profit available for dividends.
Tax-efficient protection via your own limited company
- Protect your contract income if you can't work - pay via your company
- Life insurance - save up to 50% - your ltd company pays the premiums
