What is a dividend in the UK?
A dividend is a share of a company’s profits distributed to its shareholders as a reward for their investment. Companies limited by shares pay dividends to shareholders based on their percentage of ownership and the amount of surplus income available at the time.
How often are dividends paid?
The frequency of dividend payments varies. While many companies pay dividends quarterly (every three months), others distribute them on a monthly, semi-annual, or annual basis. Alternatively, companies may issue dividends on an ad hoc basis, depending on the availability of surplus income.
How are dividend payments calculated?
Dividend payments are determined by the company’s available profits and the percentage of shares held by each shareholder. Shareholders receive dividends in proportion to their ownership in the company.
Example:
- A company issues 10 ordinary shares of equal value, representing 100% ownership.
- Shareholder A owns 6 shares (60%), while Shareholder B owns 4 shares (40%).
- If the company has £2,000 in available profits:
- Shareholder A receives £1,200 (60% of £2,000).
- Shareholder B receives £800 (40% of £2,000).
Do all shareholders receive dividends?
Not all shareholders are automatically entitled to dividends. Dividend rights depend on the type of shares issued. While ordinary shares typically carry dividend rights, other types – such as management or deferred shares – may have limited or conditional dividend entitlements.
Regardless of share type, dividends can only be distributed if the company has sufficient profits. Paying dividends without available profits is unlawful and may result in severe consequences for company directors.
Do company directors get paid dividends?
Company directors do not receive dividends solely based on their role. To qualify for dividend payments, directors must also hold shares in the company.
How much tax is paid on dividends?
Dividends are distributed from post-tax profits, meaning the company pays taxes on its earnings before issuing dividends. Shareholders are responsible for declaring dividend income on their Self Assessment tax return and paying any applicable taxes at the end of the tax year.
The first £500 of dividend income each year is tax-free. Additionally, shareholders pay no tax on dividend income within their Personal Allowance (£12,570 for the 2024/25 tax year).
After these allowances, dividend income is taxed at the following rates, depending on the individual’s total annual income:
- 8.75% for basic rate taxpayers.
- 33.75% for higher rate taxpayers.
- 39.35% for additional rate taxpayers.
Do you have any other questions?
In this article, we covered the essentials of dividends, explaining what they are, how they are calculated, and who is entitled to receive them. We also explored dividend payment frequency, taxation rules, and the importance of ensuring dividends are only distributed from available profits. By understanding these key points, you can ensure your company remains compliant and efficiently rewards its shareholders.
For more information, visit the Startxpress Help Center and the Startxpress Blog. If you have any questions, feel free to reach out to us at support@startxpress.io!
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