What is a dividend?
Paying a dividend is the usual way for a company to distribute a share of its
profits among the shareholders. There are detailed statutory rules as to the
payment of dividends in CA 1985, sec263 to sec281. A detailed consideration
of these is presently beyond the scope of this database, but the main purpose
behind these provisions is to prohibit companies from making distributions (including
dividends) except out of profits.
In a public company, the usual practice is for the directors to declare and
pay an interim dividend based on the accounts for the first six months of the
company's financial year. The directors will then recommend a final dividend
to the Annual General Meting based on the profits made in the full year, and
the AGM then passes a resolution declaring that dividend. This complies with
the Table A provisions (set out below).
In private companies the practice varies widely. If the company is making profits
there are essentially two ways in which those profits can be paid over to the
people who own and run the company. One is for the directors (or others, e.g.
family members) to be paid salaries or fees for the work they have done for
the company. Such salaries or fees will be employment income for the recipient
and must usually be taxed under the PAYE system, with the company deducting
tax at source. Both the company and the director will also be liable to make
National Insurance contributions. The other way of taking money out of the company
is for the company to pay dividends. These are paid to shareholders (rather
than directors) and (unless the company has special articles) will be paid in
accordance with the rights of the respective shareholders. Dividends are taxable
as investment income in the shareholder hands. The tax rates for dividends are
lower than for other sources of income. The basic rate is 10% and the higher
rate is 32.5%. Furthermore, when a dividend is paid the company issues the shareholder
with a tax credit of 10%, so no basic rate is payable. If the shareholder is
a higher rate taxpayer, the 10% tax credit can be used, so reducing the tax
payable to 22.5%. It can be seen from these facts that there may be considerable
scope for tax planning in selecting the right means of taking money out of a
private company on which accountancy advice should be sought.
Table A provisions on dividends
102. Subject to the provisions of the Act, the company may by ordinary resolution declare dividends in accordance with the respective rights of the members, but no dividend shall exceed the amount recommended by the directors.
103. Subject to the provisions of the Act, the directors may pay interim dividends
if it appears to them that they are justified by the profits of the company
available for distribution. If the share capital is divided into different classes,
the directors may pay interim dividends on shares which confer deferred or non-preferred
rights with regard to dividend as well as on shares which confer preferential
rights with regard to dividend, but no interim dividend shall be paid on shares
carrying deferred or non-preferred rights if, at the time of payment, any preferential
dividend is in arrears. The directors may also pay at intervals settled by them
any dividend payable at a fixed rate if it appears to them that the profits
available for distribution justify the payment. Provided the directors act in
good faith they shall not incur any liability to the holders of shares conferring
preferred rights for any loss they may suffer by the lawful payment of an interim
dividend on any shares having deferred or non-preferred rights.
104. Except as otherwise provided to the rights attached to shares, all dividends shall be declared and paid according to the amounts paid up on the shares on which the dividend is paid. All dividends shall be apportioned and paid proportionately to the amounts paid up on the shares during any portion or portions of the period in respect of which the dividend is paid; but, if any share is issued on terms providing that it shall rank for dividends as from a particular date, that share shall rank for dividend accordingly.
105. A general meeting declaring a dividend may, upon the recommendation of the directors, direct that it shall be satisfied wholly or partly by the distribution of assets and, where any difficulty arises in regard to the distribution, the directors may settle the same and in particular may issue fractional certificates and fix the value for distribution of any assets and may determine that cash shall be paid to any member upon the footing of the value so fixed in order to adjust the rights of members and may vest any assets in trustees.
106. Any dividend or other moneys payable in respect of a share may be paid by cheque sent by post to the registered address of the person entitled, if two or more persons are the holders of the share or are jointly entitled to it by reason of the death or bankruptcy of the holder, to the registered address of that one of those persons who is first named in the register of members or to such person and to such address as the person or persons entitled may in writing direct and payment of the cheque shall be a good discharge to the company. Any joint holder or other person jointly entitled to a share as aforesaid may give receipts for any dividend or other moneys payable in respect of the share.
107. No dividend or other moneys payable in respect of a share shall bear interest against the company unless otherwise provided by the rights attached to the share.
108. Any dividend which has remained unclaimed for twelve years from the date when it became due for payment shall, if the directors so resolve, be forfeited and cease to remain owing by the company.
A company may have shares which have a priority as to payment of a dividend
(preference shares). See related Topic, What are classes of shares?
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