We’re here to simplify one of the most common financial topics – dividends – in a way that actually makes sense. Whether you’re running your own business or just curious, let’s break it all down for you:
What Are Dividends?
Think of your business like a bakery. You work hard baking cakes, selling them, and paying for your ingredients, rent, and staff. At the end of the day, if there’s money left over, that’s your profit – your “business cake.”
Dividends are like slicing up that cake and sharing pieces with your shareholders (people who’ve invested in your business). It’s a way of saying, “Thanks for backing me – here’s a piece of the pie!”
Cash vs Profit – What’s the Difference?
Here’s where it can get a bit confusing. Let’s go back to the bakery example:
You might’ve sold loads of cakes today and made a tidy profit, but what if your customers paid by card and the money hasn’t hit your account yet? Or you’ve still got bills to pay for flour and butter? Even if your business looks profitable on paper, you might not have enough actual cash in your bank account to hand out dividends right now.
In simple terms: profit is what you’ve earned; cash is what you’ve got right now to spend. You can only pay dividends from profit that’s available and in the bank as cash – they’re two sides of the same coin, but they don’t always match up.
Don’t Forget About Corporation Tax and Other Bills
Before you start handing out dividends, you’ve got to make sure your financial house is in order. In the UK, this means you must set aside enough cash for things like:
- Corporation tax (the tax your business pays on its profits).
- Any other liabilities (for example, unpaid bills, wages, or loans).
If you don’t have enough left to cover these essential expenses, paying out dividends isn’t just risky – it’s illegal.
What Are Illegal Dividends?
Imagine your business account is running low because you’ve got upcoming tax bills to pay. But instead of keeping that money safe, you decide to pay out dividends to your shareholders anyway. That’s what’s called an illegal dividend – paying out cash your company doesn’t actually have spare.
This can land you in serious trouble:
- Shareholders might have to pay back the dividends if they were illegal.
- Directors could be held personally responsible if they knowingly approved the payment.
The bottom line? Always check your figures carefully before declaring dividends.
Avoiding Trouble (And Keeping Things Simple)
Here’s the golden rule: only pay dividends when your company has enough profit and cash to do so after accounting for all its taxes and liabilities. It’s not worth the risk to overextend your business.
This is where we come in. As a modern, straightforward accountancy firm, we’ll help you:
- Understand your cash flow.
- Keep on top of your tax obligations.
- Figure out when and how much you can pay out in dividends safely.
No jargon, no stress, just clear advice to keep your business on track.
Got questions?
We’re here to help. Drop us a message or give us a call, and we’ll help you navigate your business finances with confidence.
