Understanding Dividends

It’s really important to understand how dividends work in small business as this can help you get your profits out of your business in the most tax efficient way. However there are rules about when we’re allowed to take profits out.

Dividends are payments of profit out to the owners of the business. Dividends have to be paid in proportion to shareholding (unless your accountant has set up a different structure)

Many business owners pay themselves a minimum wage so they don’t pay tax through the payroll, and then top up their earnings with dividends.

The main rule is that you MUST have enough cumulative retained profits after tax to be able to pay the dividend. For this reason if you’re loss making then you won’t be able to take dividends.

It’s very important to keep accurate monthly profit and loss records to make sure that throughout the year you are making enough profits to take dividends. You may end up with an unexpected tax bill if your profits aren’t enough and you’ve been taking dividends out.