Paying dividend to retained earnings
Limited companies can distribute profits they generate via dividends to company shareholders.
How do dividends affect retained earnings? | Investopedia
However, you must ensure that all dividend distributions are legitimate, otherwise you could fall foul of HMRC. The legal basis for dividends are contained in The Companies Act Dividends can only be paid out of retained profits. Retained profits are the funds remaining after all liabilities and expenses have been taken into account.
Dividend Earnings, Payout Yield, Ex-Dividend Date Explained
If you have undistributed profits remaining on the balance sheet from previous financial years, this sum can be added to the current level of retained profit. If you do not have access to your realtime accounts, and you cannot accurately calculate your current position, you should ask your accountant to do so before paying a dividend.
The board of directors first needs to pass an ordinary resolution to declare dividends and record the fact in the Company records. When you declare a dividend, you must provide each shareholder with a dividend voucher, which shows the type of shares held, the number of shares, the dividend amount, and the tax credit.
Shareholders will need the information contained on the tax voucher for the self assessment process. Read our dedicated articles on how dividends are taxed and the paperwork required for dividend declarations for more information. This can lead to an HMRC investigation, penalties, and even the dividend being re-categorised as salary, subject to extra income tax and National Insurance Contributions. Clearly, to avoid a situation like this arising, always ask your accountant first if you have any doubts over the level of dividends you want to distribute.
If you have declared a dividend incorrectly, also contact your accountant who will be able to advise how best to correct the error.
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