To pay a dividend your company has to have been making a profit and a sufficient profit to cover the payment of the dividend (called a distributable profit). You may have more cash than you have profit (perhaps because you got paid in advance) but you must not pay yourself out of this cash. The reason for this is because it is assumed that until you have recognized the sale and made a profit the money could be owed to someone else.
Let’s say you were to buy loads of stock on credit and immediately resell them. You should have generated a lot of cash but still owe your supplier. If you were to take all the cash outside the business then you wouldn’t have enough money to pay the supplier.
So quite reasonably you have to be able to prove that you are paying yourself out of profits. The only way to do this is to have a set of accounts prepared up to the date you decide to pay yourself a dividend, this will be monthly in most cases. A simple spreadsheet will suffice here but you need to remember to include a cost for tax. To do this it is best to assume you are going to incur a tax charge of 25% on your profits. You are hopefully going to be paying around 20% but 25% gives you a healthy margin of error.
Then from the remaining profits you can pay yourself a dividend. Note that all these calculations have to be considered on a cumulative basis. See the table below:
The business started trading in January 2011 and had an unusually high amount of expenses in that month connected with starting the business. From then on the business was comfortably earning £2,250 per month in profit after tax. It was only at the end of May 2011 that those losses in January 2011 were recouped.
It is not possible to pay a dividend until May 2011. Any dividend paid when the ‘Distributable profits c/f’ line is showing a loss will be an illegal dividend and risk being deemed by HMRC as a salary.
It’s difficult to prepare a spreadsheet for a generic company to use for these purposes. If you would like one custom made to your business then get into contact and we will happily prepare one for you.