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How do UK companies pay dividends to their shareholders?

How do UK companies pay dividends to their shareholders?
Barbara Hughes

By Barbara Hughes

01 Jun 2023

A dividend is a payment made to a shareholder from a company’s profits after corporation tax has been accounted for.

For businesses that operate as limited companies, dividend payments are sometimes the most tax-efficient way of withdrawing money from the company.

Final and interim dividends

Dividends are classified as either ‘final’ or ‘interim’ dividends.

A final dividend is declared in respect of a specific accounting period and is approved by shareholders – usually following a recommendation by the directors -either at a shareholder meeting or, for private limited companies, by way of a written resolution.

An interim dividend is paid in respect of part of an accounting period and can be declared at any time. Interim dividends can usually be approved by the directors alone.

Due to their flexibility, most dividends for private companies are declared and paid as interim dividends.

The dividend amount

Companies should check their articles for any special provisions but generally, the directors can decide on the amount and timing of any dividend.

The directors will use relevant financial information (such as management accounts) to decide whether the company is able to pay a dividend – and the amount which, with due consideration to the company’s cash needs and business plans for the future, it is appropriate to pay.

A company can only pay dividends from post-tax profits or ‘profits available for the purpose’. A company cannot pay out more in dividends than is available from profits from the current or previous years.

A company’s profits available for the purpose of a distribution are its ‘accumulated, realised profits, so far as not previously utilised by distribution or capitalisation, less its accumulated realised losses, so far as not previously written off in a reduction or reorganisation of capital.’

Care should be taken to ensure dividends are only made from available profits.

When a dividend is approved, a record date is agreed – and it is the shareholders on the register on the record date that are entitled to the dividend.

Dividend are declared as an amount payable per share (on a certain share class) – so the amount paid to each shareholder is in proportion to the shares held.

How dividends are declared and recorded

A directors meeting (or resolution) will agree and ‘declare’ a dividend – the details of which will be recorded in minutes (or in a written resolution). Usually, only if the dividend is being declared as a Final Divided will an additional shareholder meeting or shareholder resolution be required.

A dividend statement should also be prepared for each shareholder showing the shareholder’s name, the date of payment, the number and class of shares on which the dividend is paid and the dividend amount. A copy of the statement should be given to the shareholder for their tax records.

Can a shareholder waive their entitlement to dividends?

Yes – a shareholder can waive (or partially waive) their entitlement to a dividend and such waiver can cover a specific dividend or a number of dividends within a certain period or all future dividends. However, the drafting any waiver document is a ‘reserved activity’ that can only be carried out by a solicitor – specialist guidance and advice should be sought.

In order to provide flexibility in the payment of dividends, companies can issue shares of differing share classes to different shareholders (eg Ordinary-A and Ordinary-B shares). This allows different amounts to be paid to shareholders without the need for waivers.

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