What are Dividends?
Dividends represent a portion of a company’s profits that the company distributes to its shareholders. If you own shares in a company and that company has had a profitable year, you might receive a dividend.
Dividends are not a cost to the business and therefore do not reduce the amount of Corporation Tax due.
Profit Reserves
Profit reserves consist of the portion of a company’s profits retained in the business after paying expenses, taxes, and dividends to shareholders.
These reserves act as a financial cushion, providing the company with funds to reinvest in the business, cover unexpected expenses, or pay future dividends. By maintaining profit reserves, a company can ensure financial stability and support long-term growth and sustainability.
For Example: If a company makes a profit of £50,000 in its first year, it will pay £9,500 in Corporation Tax, leaving £40,500 in profit after tax. The company can then pay the dividends from this remaining profit. If the shareholders decide to take £30,000 in dividends, the company will have £10,500 left.
This remaining amount – the Profit Reserve – will carry forward and can fund dividend payments in the following year.
Declaration
The company’s board of directors usually declares dividends and pays them to shareholders on a per-share basis. The board determines the amount of the dividend per share based on various factors, such as the company’s financial performance, cash flow, and future growth prospects.
Availability
Not all companies pay dividends.
Some companies may choose to reinvest their profits in the business instead of distributing them to shareholders. Additionally, the company does not guarantee dividend payments, and they may fluctuate based on financial performance and other factors.
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