Paying Dividends
Dividends are a way to reward shareholders, reflecting their investment in a company's success.
Dividends represent a portion of a company’s profits distributed to its shareholders. They are a key indicator of financial health and a significant incentive for investment. Properly managing dividend distribution is essential not only to reward shareholders but also to maintain regulatory compliance and sustain corporate growth.
At Lawhive, our network of corporate lawyers are on hand to provide expert legal services for dividend distribution. They will guide you through the process of declaring and paying dividends, ensuring you meet all legal requirements while optimising your dividend strategy.
Whether you are a company director, shareholder, or business owner, we are committed to helping you with the legal and financial aspects of paying dividends including:
Advising on the legal requirements and best practices for declaring dividends;
Assisting in the preparation and distribution of dividend documentation;
Ensuring compliance with corporate governance and financial regulations;
Providing strategic advice.
Contact us today for a free case evaluation and get a no-obligation quote for assistance with all aspects of paying dividends. Our personable and knowledgeable Legal Assessment Team is ready to support you in making informed decisions that benefit both your company and shareholders.
What are dividends?
Dividends are a portion of a company's profits that are distributed to its shareholders as a reward for their investment in the company.
They serve as a tangible return on the shareholders' investment and reflect the company's financial health and profitability.
Dividends can be issued by both private and public companies.
Why do companies pay dividends?
Companies pay dividends to:
Provide shareholders with a direct return on their investment;
Signal that the company is financially healthy and generating sufficient profits;
Attract and retain investors;
Efficiently use profits, particularly for mature companies with stable cash flows and limited reinvestment opportunities;
Avoid overcapitalisation, where a company holds more cash than it can productively invest;
Distribute profits from non-recurring or non-core activities rather than reinvesting them in the core business.
What are the different types of dividends a company can pay?
Companies have several options when it comes to paying dividends to their shareholders.
Each type has its own characteristics and implications.
Type of Dividend | Description | Frequency | Impact |
|---|---|---|---|
Cash Dividends | Cash dividends are the most common form of dividend payments. Shareholders receive a cash payment, typically on a per-share basis. | Can be paid regularly (e.g., quarterly, semi-annually, or annually) or as special dividends. | Cash dividends provide immediate income to shareholders but reduce the company's cash reserves. |
Stock Dividends | Instead of cash, shareholders receive additional shares of the company's stock. This increases the number of shares each shareholder owns. | Usually issued as a percentage of existing shares (e.g., a 5% stock dividend means shareholders receive an additional 5 shares for every 100 shares owned). | Stock dividends dilute the share price but do not affect the company's cash position. They can signal confidence in the company's future. |
Interim Dividends | Dividends are paid before a company's annual general meeting (AGM) and the finalisation of its annual accounts. | Typically declared and paid out quarterly or semi-annually. | Interim dividends provide shareholders with a portion of profits throughout the year. |
Final Dividends | Declared at the end of the financial year after the company’s accounts have been finalised and approved at the AGM. | Annually. | Final dividends often represent the bulk of the company’s annual dividend payments and provide a clear indication of the company’s yearly performance. |
Special Dividends | One-time payments are made in addition to regular dividends, often from extraordinary profits or a specific financial event (e.g., asset sale). | Irregular, based on special circumstances. | Special dividends are a way to distribute surplus cash without committing to ongoing higher payments. |
Property Dividends | Dividends are paid in the form of physical assets rather than cash or stock, such as property, products, or other tangible items. | Rare and typically used in specific circumstances where liquidating assets is beneficial. | These can be complex to administer and may have tax implications for the company and shareholders. |
Scrip Dividends | Shareholders are given the option to receive dividends in the form of additional shares instead of cash. This can be attractive during periods when cash conservation is critical. | Usually offered during periods of cash flow constraints or when the company wants to retain cash for growth. | Scrip dividends help preserve cash while rewarding shareholders with increased equity. |
Liquidating Dividends | Payments are made to shareholders when a company is partially or fully liquidated. These dividends are paid from the company’s capital base. | One-time payments during liquidation events. | Liquidating dividends returns invested capital to shareholders and signals the winding down of company operations. |
How do I know if my company has enough profits to pay dividends?
In England and Wales, dividends can only be paid out of profits available for distribution. This is a legal requirement under the Companies Act 2006.
To work out if your company has enough profits to pay dividends you have to calculate distributable reserves.
To do this:
Start with the net profit for the current year;
Add retained earnings from previous years;
Exclude any unrealised profits and deduct any unrealised losses;
Deduct any dividends already declared or paid out during the year.
You must also review the cash flow statement to ensure the company has sufficient cash to pay the dividend as, even if the company has enough distributable profits, it must also have enough cash to make the payment.
What legal requirements must be met to declare a dividend?
Key legal requirements for declaring a dividend include:
Sufficient distributable profits;
Board approval;
Shareholder approval;
Compliance with Articles of Association;
Accurate records for dividend payments and documentation.
Under the Companies Act 2006, a company can only pay dividends out of profits available for distribution.
This means the company must have enough distributable profits, which are typically accumulated realised profits minus accumulated realised losses.
You must make sure that these profits are confirmed before any dividend is declared to avoid legal repercussions.
What is the process for declaring and paying dividends?
First, you must make sure that the company has enough profits to pay the dividends and that they are distributable, meaning they are not already allocated to other expenses.
You also need to determine the exact amount each shareholder will receive by determining the total amount of dividends to be distributed.
To do this, calculate each shareholder’s share based on the number of shares they own.
Step 1 - Hold a board meeting
To propose and approve the dividend payment schedule a meeting with the company’s directors. Within the meeting, discuss and propose the amount of dividends to be paid.
To get approval, the directors will vote to approve the dividend payment. This is then documented in the meeting minutes.
Step 2 - Communicate with stakeholders
To inform shareholders about the dividend decision, send a notification to all shareholders about the approved dividend.
You should include details like the amount of the dividend, payment date, and any other relevant information.
Step 3 - Execute payment and record transaction
To distribute the dividends and keep accurate records, transfer the dividend amounts to the shareholders. This can be done via bank transfer or cheque.
You must document the transaction in the company’s financial records, noting the amount paid to each shareholder and the payment date.
What are the tax implications for receiving dividends?
You can earn up to £500 in dividends without paying tax, regardless of your tax bracket.
If your dividend income exceeds the tax-free allowance and isn't part of a tax-sheltered investment (like an ISA or SIPP), you'll need to pay tax on the excess.
Dividends earned from investments in ISAs (Individual Savings Accounts) or SIPPs (Self-Invested Personal Pensions) are not subject to income tax.
If you live outside the UK, the tax you pay on UK dividends might be influenced by double taxation treaties between the UK and your home country.