As a limited company owner, you may have come across the terms ‘interim’ and ‘final’ dividends. So, what do these terms mean in practice?
Let’s start with a quick definition of a dividend: a payment from a company distributed to its shareholders as a portion of its profits (after all liabilities and expenses have been deducted).
It is the Director/s decision to pay dividends, and there are certain responsibilities they must undertake such as recording them in minutes and ensuring there are sufficient funds to pay the dividends without negatively impacting the company’s cash flow.
A company can declare two types of dividends – final and interim.
In short, final dividends are those announced at the end of the company financial year.
Interim dividends are announced when the company earns surplus profits. Throughout this article, we’ll explain this further as well as the differences between the two.
Final Dividends explained
At the end of the company financial year, once the annual accounts have been approved and the company’s financial position is clear and understood, the board of directors can then recommend the final dividends.
The recommendation would take place in a meeting of the board of directors. The dividends then also need to be agreed by/voted on by the shareholders. The company is then obliged to pay the agreed dividends – there can be no revoke.
Interim Dividends explained
Interim dividends are those paid before the company’s annual financial accounts are completed – they can be paid at more frequent intervals such as quarterly, or on an as-and-when basis, so long as six months of the first financial year have passed.
They are agreed by the board of directors and unlike final dividends, typically don’t need to be agreed by the shareholders.
Due to their nature, they aren’t always suitable for new or growing businesses that could be better off holding on to some or all of the profits for re-investment or growth purposes.
On the other hand, for those companies in a stronger financial position and confident of an effective cash flow for the remainder of their financial period, they are a good opportunity for shareholders to receive their return on investment and share of profits before the end of the year.
Interim vs. Final Dividends – The main differences summarised
Timing of announcement and distribution:
- Interim: Throughout or during the financial year, before annual accounts have been finalised.
- Final: At the end of the financial year, after accounts have been finalised.
- Interim: Announced and agreed at a general meeting by the board of directors
- Final: Announced by the board of directors at the AGM and agreed with the shareholders.
- Interim: If all shareholders consent to the cancellation of the dividend allocation, they can be cancelled.
- Final: these cannot be cancelled – once they are declared, they must be issued.
Rules and obligations:
- Interim: The company’s article of association will need to set out the dividends.
- Final: This is not needed for final dividends.
Further reading on dividends
Many thanks to Christian Hickmott, Managing Director of Integro Accounting for providing this advice.
For further reading including how to declare dividends, the thresholds, and tax applied to dividends, Integro’s Contractor’s Guide to Dividends is a good read.
Also, try these guides elsewhere on our site:
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