A dividend is a payment that can be made out to the shareholders of a limited company if it has made a profit (it literally ‘pays dividends’). A dividend must usually be paid to all of the company’s shareholders. Even if there’s only one shareholder in the company there must be a director’s meeting held to declare the dividend pay out with a record of minutes kept for the meeting. For every dividend payment the company makes it also has to create a dividend voucher with one copy given to the shareholder and one kept by the company for its records. This voucher needs to show the date, the company name, the name of the shareholder being paid a dividend and the amount of the dividend.
A company doesn’t need to pay tax on dividends but dividends are not deductible as a cost from Corporation Tax. Shareholders may have to pay income tax on dividends if they exceed £2,000. (You can use our dividend tax calculator to find out how much tax you’ll pay on your dividend earnings for the current tax year.)
If a director takes more money out of the company than they’ve put in which isn’t expenses, a salary or dividend, then this is counted as a directors’ loan. Directors’ loans are handled and taxed differently to dividends.