Dividends is this week’s topic of I Hate Numbers.

In this podcast I am going to chat to you about the whys and what of dividends, plus the correct and legal way to pay yourself with dividends

Paying yourself

If you are your own boss, there are two main business structures that you can have. You can either be a sole trader or a company.

In both cases you need to pay yourself, but no dividends if you are a sole trader. Listen to find out more.

Dividends are your company profits that you are paying yourself. Tax, or reducing tax plays a big part behind why owners pay themselves dividends. Company tax, personal tax and national insurance are all part of that balancing act in deciding how much you should take.

Add to this your personal tax situation, from basic rate taxpayer and beyond. You’ve a heady cocktail of thought processes going around. Your dividend will be part of your personal income, with tax rates being as low as 7.5% to a 38.1%, it’s all about tax status.

Tax is not the only thing to consider. Control plays a part in how much dividend you pay. If you’re the director, you decide when you pay your dividend. This could be a big deal when you’re looking to keep your personal income and tax bill to a modest level.

Procedure, there are rules

One thing often forgotten by company owners is that are rules governing how companies are run. It may seem like jobs worth talk, but there’d a sound reason to have these rules. Running your business through a company protects you. If things get messy your personal assets are protected. Any responsibility for company debt normally is your company's shoulders, not yours.

Illegal Dividend

Above all, follow the required due legal process in paying yourself a dividend, otherwise it's illegal. You will not go to prison, it will be a civil offense. As a result, an illegal dividend will be classified as a director's loan, and that's a whole different rabbit hole.

Rules

• Firstly, prepare accounts showing that profit is being made. Profit is after all all your business expenses, including company tax.
• Have a board meeting, it could be at your kitchen table, but have a meeting.
• Pass a resolution as to what will be paid, and keep a record.
• Prepare a dividend voucher – we’re not talking Amazon voucher by the way

What Next

Grab a coffee, make yourself comfortable, sit back and listen.

I love doing this podcast and sharing my love of Numbers with you. Check out the link to subscribe and do not miss an episode, contact me for help with Number love in your business .

In This Episode

• Understand what dividends are
• Appreciate why you pay yourself dividends
• How the dividend rules and regulations apply to you paying dividends
• Developing your own Numbers confidence and decisions
• Take more control of your numbers to help make you money, survive and thrive

Links

https://podcasts.apple.com/podcast/proactiveresolutionss-podcast/id1500471288

https://play.google.com/music/m/I3pvpztpjvjw6yrw2kctmtyckam?t=I_Hate_Numbers

https://open.spotify.com/show/5lKjqgbYaxnIAoTeK0zins

https://www.stitcher.com/podcast/proactiveresolutionss-podcast

https://tunein.com/podcasts/Business–Economics-Podcasts/I-Hate-Numbers-p1298505/

You are listening to the I Hate Numbers Podcast with Mahmood Reza. The I Hate Numbers podcast mission is to help your business survive and thrive by you better understanding and connecting with your numbers. Number love and care is what it's about. Tune in every week. Now, here's your host, Mahmood Reza.

Hi, folks, and welcome to episode 26 of I Hate Numbers. Far from hating numbers, and I think they're brilliant and they're a great way for you to make your business grow, survive, and thrive. What's not to love? My mission during this podcast is to share the world of numbers with you business owners out there,

give you some insight, get you a bit closer to your numbers, so you can make money in your business and save time in the process. So, what's today's topic all about? So, in episode 26 of I Hate Numbers, I'm going to have a look, a very popular topic, certainly we know it by name, and that's the topic and subject of dividends.

More specifically, I'm going to look at three things. I'm going to look at what they are, why we bother with them, a little bit of tax thrown in there as well, and more importantly, the correct way to pay yourself dividends. And yes, there is a correct way and there is a legal framework we've got to follow. Far too many people pay themselves dividends and actually ignore the regs.

Does it matter what it does? Because it'll be illegal if you don't follow the right route map. Okay, so let's crack on with the show. You are your own boss. There are mainly two ways that you can run your business in terms of the business structure that you can have. You can either be a sole trader, solepreneur, freelancer i.e. an individual, or you can run your business through a company.

Typically in accounting, keeping records, you keep records separately for your business, whether you're a sole trader or a company, but in legal terms, if you're a sole trader, you and the business in legal terms are one of the same. If you run your business through a company, then in legal terms, there's a separation and your relationship with that company, that artificial thing that you created is as a director, brackets shareholder,

brackets employee. For more details on this check out episode 14 of I Hate Numbers, where we had a chat and insight into your business structure. Dividends is only applicable where you run your business through a company. So, if you're a sole trader, dividends does not apply to your business. So, let's move the conversation forward.

So, we're talking dividends is an area that's applicable where you run your business for a company. More specifically, that company has to be one that's called a company that has got shares. So, what have we got so far? We've got that dividends are applicable where you run your business through a company.

We’ve then talked about that company must have shares. So, limited-by-guarantee companies, they're out of the loop as far as dividends are concerned. Let's address what dividends actually are. Dividends are your company giving the profits that it makes to you. It's your reward. It's typically a technique that's used where you can extract funds out of your company

into your personal account. So, it is part of what they might call the way that you reward yourself, your remuneration strategy. Typically, in the main, individual shareholders and directors reward themselves by paying a salary and also rewarding themselves with dividends. That's certainly a very common route, but it's not the only route to take funds out of your own company.

Dividends are fundamentally profits that your company makes, which is distributing to you as a shareholder. As a contrast, by the way, if you are a solepreneur, a sole trader, that idea of dividends is actually the technical phraseology, that little bit of jargon I'm going to chuck at you is what's called drawings.

So, when you pay yourself out of your business as a sole trader, that isn't called dividends. That's actually called drawings. The second thing that we, I want to flag up is why people pay themselves dividends. What's the rationale? What's the reasoning behind that? Typically, it's about tax. Tax is the driver as to why most people want to reward themselves by way of dividends.

So, two headlines here for you to share. Number one, if you pay yourself dividends, then the company does not pay national insurance on that dividend, which means potentially there's a tax saving for the company. She would suspect not everything is straightforward when it comes to the subject of taxation.

So, the company will not be paying any national insurance on that dividend. However, dividends do not count as business expenses, which means the company tax bill will not be reduced by paying out dividends. So, there's a bit of a balancing act to make. The second angle of tax to consider is the individual shareholder of the company.

So, dividends in your hands, so to speak, not physically, but going into your individual funds, forms part of your income. Does it matter? I'm afraid it does because individuals who come within the personal tax regime, what we might call in the UK self-assessment, have to declare that dividend income as part of their tax-return filing.

So, we don't get away with it completely. The heads up though, in terms of rates and in terms of how much tax you pay. Well, that's the classic ‘it depends’ argument, but first of all, 2,000 pounds worth of dividends are free of tax. Nothing to pay anything after that though, then the rates of tax go up accordingly.

You pay 7.5% if you remain what's called a basic-rate taxpayer i.e. all your income doesn't go over 50k. Like all things tax-related, by the way, check the rates accordingly, but so we're talking about the rates where we are in real time, 2020. Over that figure, it goes to 32.5% as a massive jump up there.

And if you become what's called an additional-taxpayer, additional-rate payer, that's where your income in total goes over 150k, then that's 38.1% that you pay on those dividends. So, a massive ramp up, but if your income stays below the 50k level, then there is a potential tax benefit. Other potential benefits of rewarding yourself by dividends is that you as the company owner, the company director and shareholder, can control how much dividends you receive at a particular point in time.

So, as a director-shareholder, you can control the level of income you receive at any point in time. The third area I want to dip into now is procedure, what I call legality/illegality. Sorry to be a party-pooper here, but there are rules and regulations as laid out in legislation as to the procedure you have to go through when you pay yourself a dividend.

One thing often forgotten by business owners who run their businesses through companies is that there is a large amount of rules and regulations governing how companies are run. So, you might be thinking that's a bit of a top heavy bit of bureaucracy, but there is actually a good, sensible reason for that.

The first is that if you run your business through a company, that gives you a certain amount of protection, so if things go wrong in your business, your personal assets are protected. If anything goes wrong, the liability, typically who's responsible, typically falls on the company's shoulders, not you as an individual.

Now, as a trade off there, what the regulations are trying to do is to protect those people who interact with your company i.e. suppliers, third parties, and what it says is we want to operate a set of rules here that gives those individuals, those other third parties, some degree of protection. So, there is a bit of

common sense, I would suggest, behind why those regulations are actually there. Maybe common sense is not the right word, but it's the word that springs to mind. If you do not follow the required due legal process in paying yourself a dividend, then the dividend itself is illegal. Now, you won't go to prison.

You won't be serving time, but it will be a civil offense. In addition, if that is ever picked up by the tax authorities here, your dividend will be classified as what's called a director's loan, and that's a whole different rabbit hole. Certainly, a great topic for another episode of I Hate Numbers. The first thing to consider is that dividends cannot be paid out of your company unless your company is making a profit.

And it's not just making a profit. It's making a profit after all the expenses have been taken into account, and after any tax that the company is due to pay is also considered. So, whatever's left over after paying for all the operating costs of your business, paying for all the running costs of your business, providing for all tax liabilities, any interest on any borrowings, so whatever's left over

forms the basis of the dividends that you can pay to yourself. Draw up accounts, draw up a profit statement to see at least that you are making profits. It's the total profits that you've made since your business started that is the reference point. If you are making losses, which is not unusual if you are pivoting, you're just starting up, then you cannot pay yourself dividends out of your company.

So, that's a definite no-no. So, profits, make sure you've got the evidence by way of accounts that that's going on, and make sure you deduct any costs in relation to that timeframe. The next thing you need to consider is the actual records and the evidence to back up the dividend. You might be thinking, hang on, Mahmood, this is a bit top heavy. I'm afraid, guys,

that's what it says in the regs. So, first of all, you need to have a board meeting. Now, it could be at your kitchen table, it can be a back bedroom. You could have a separate office, even if it's just you, by the way, you are the sole director, shareholder of your company, then you still have a board meeting.

You have a meeting, you have a what's called a resolution. Effectively, a document that says, this meeting was held at this date, on this date. This is the dividend that we are going to declare that's paid out to the shareholders. Keep a record of it. Keep a minute of it. The other things that I would recommend is you prepare what's called a voucher.

Now, I'm not talking about an Amazon voucher or a John Lewis voucher, but just a document that says, this is the dividend that's paid to this individual shareholder in relation to their shareholding. Minute it, document it, put it on one side, and then obviously if the company's got the cash, pay their dividend accordingly.

There is no set time frame, by the way, for how often you can pay yourself dividends. As a rule of thumb, I would, generally speaking, advise an interim dividend three to four times in a year. So, you pay that during the course of the year. The paperwork tends to be a lighter touch as well. Once you get to the end of your financial year, ideally beforehand, is you see what your profits are and you can declare that final dividend accordingly.

Okay, folks, so let's wrap up. What have we talked about? We've talked about what dividends are. We've shone a light on the tax impact of paying dividends. We've looked at the legality or otherwise of paying dividends and the records that you need. So, paying yourself dividends could be a fantastic way to reward yourself.

It has the flexibility. You can control it. There could be some tax benefits there as well. I say could because you look at the whole shooting match. So, folks, hoping you enjoyed this episode of I Hate Numbers. I've enjoyed doing it. I'd love it if you could subscribe and share some of that love with your friends, colleagues, and associates.

Until next week, have a great week ahead. We hope you enjoyed this episode and appreciate you taking the time to listen to the show. We hope you got some value. If you did, then we'd love it if you shared the episode. We look forward to you joining us next week for another I Hate Numbers episode.