Dividends

Dividends

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Hi

My boss whats to know how to calculate the dividends he is allowed to take. He is the only director in his Ltd company.

My understanding is you take Income less expenses less corporation tax of 21%. That's probably a crude analysis, I have searched the internet for some sort of template I can use but can't find the right thing.

Is anyone able to help me out here.

Many thanks

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Euan's picture
By Euan MacLennan
05th Mar 2013 09:58

Not quite

It is irrelevant if your boss is the only director.  What matters is that he is the only shareholder.  If so, dividends can legally be paid only out of accumulated (undistributed) profits after tax according to a set of accounts. 

The starting point is therefore the balance carried forward on the Profit & Loss account in the previous year's statutory accounts.  A sole shareholder could take that entire balance as a dividend.

With regard to the current year, you need to prepare management accounts for the period up to date.  The crude profit would indeed be income less expenses, but you should also be allowing for accruals and prepayments, stock if any and depreciation of fixed assets to arrive at the net profit before tax.  Tax is more complicated as it involves adding back depreciation to the net profit and deducting capital allowances which might well be more than the depreciation.  However, tax at 20% (not 21%) of the net profit after depreciation would give you a reasonable estimate for arriving at the net profit after tax so far in the current year.  A sole shareholder could take that as dividend in addition to any accumulated profits brought forward.

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Replying to vdeepan3:
By Tonykelly
05th Mar 2013 10:06

not quite true

Euan MacLennan wrote:

It is irrelevant if your boss is the only director.

Remember that directors can authorise payment of interim dividends so the number of directors is hardly irrelevant.

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Man of Kent
By Kent accountant
05th Mar 2013 10:11

Your boss

Needs to speak to the company accountant, that's what he's there for.

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By JuliaKing
05th Mar 2013 14:45

Thank you all for your comments. I realise the net profit takes into account prepayments & accruals and all my wages journals will have been dealt with as well. I could deal with depreciation, but I would tend to let the accountant deal with this aspect at the year end.

This is first year of trading and I was hoping there would be a rough calculation I could perform. My boss is taking a monthly salary, which is just enought to keep him in the NIC loop without paying any tax. He wants to take money out as dividends and I was hoping there was a formula I could use. I completely agree with Kent accountant, however, as my boss is not happy with his current accountant, he is in the process of obtaining quotes for a new accountant. In the mean time he wanted to take money from his business, but does not want to get into trouble with HMRC. His year end is 31st March, so there is not much time before the year end.

If there is no basic formula I can perform, then we will have to wait for the new accountant to be established and he will have to take extra money in form of wages.

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