As FreeAgent Friendly Accountants we have outlined below how the dividend process works in FreeAgent.

Remember there are two key elements to consider when voting a dividend:

1 – Does the Company have sufficient distributable profits?

2 – Is there an impact on the personal tax of any of the shareholders?

(we are assuming a simple scenario of an owner managed business here with just a few shareholders at most)

1 – Does the Company have sufficient distributable profits?

  • Update all bank account transactions, make sure everything is explained up to the current date
  • Claim any out of pocket expenses that haven’t yet been claimed (these are business costs you have paid for personally)
  • Make sure all Sales invoices to date have been raised
  • Once you’re happy everything is up to date go to “Accounting”, “Reports”, “Profit & Loss” and on the right hand side choose “Yearly” then “Current year to date”
  • At the bottom this will show the Operating Profit for the current year to date, the estimate of the running Corporation Tax liability, any Dividends that have been declared to date and any brought forward distributable profits from previous years. At the very end it will show how much the current distributable profits are. This is the maximum dividend you can declare at this point in time.
  • We would always suggest to lean on the side of caution and leave some reserves in the company
  • Before deciding what your dividend will be work through section 2 below

2 – Is there an impact on the personal tax of any of the shareholders?

  • As long as your total personal taxable income for the personal tax year stays below the higher tax threshold there will be no personal tax to pay on your dividends.
  • From a personal perspective you need to Gross up the cash dividends you have paid by 10%. You do this by taking the cash dividend e.g £1,000 and dividing by 0.9 to give £1,111.
  • FreeAgent will show you your running gross dividend position for the tax year if you go to “My Money”, “Dividends”
  • The higher tax threshold for the 14-15 personal tax year is £41,865
  • If you go over the higher tax threshold the amount of cash dividend that is in the higher tax bracket will be charged at 25% tax to start with
  • There are other threshold which will cause a higher tax rate than the 25% including £50k for Child Benefit, £100k for withdrawal of the personal allowance and £150k for the top tax rate.
  • Many people for this reason will choose to stay below the higher tax threshold and leave any additional profits in the company for future use.

When you’re happy with the amount of dividend to pay you need to pay it then raise the paperwork.

When you explain the bank payment on FreeAgent book it to “Money Paid to User” then the user.

If you are paying more than one shareholder please make separate bank payments but make sure you make the payments in line with the % of shares owned by each person (assuming everyone is on the same class of ordinary shares)

If you are a One Shareholder company then you can use the FreeAgent paperwork by printing it out and signing it. Go to “My Money” then “Dividends” then click on the relevant dividend before downloading the PDF.

If you have more than one Shareholder you can ask us for our template as FreeAgent doesn’t manage the paperwork very well for multiple shareholders currently.

Make sure you raise dividend paperwork asap and keep the signed hard copies filed away should they ever need to be produced on a HMRC inspection.