By Toby Cotton on Small Business – Advice and Ideas for UK Small Businesses and SMEs
Dividends are a great way to extract profits from a company to pay shareholders, including directors, and there can be many tax advantageous points to it. But with any extraction, proper procedures need to be in place to ensure they are legal and fair.
Many small company director/shareholders decide to take a mixture of salary and dividends making use of the basic rate band in order to reduce tax. This is usually done by taking salary up to the minimum before you pay National Insurance or PAYE, and then top up with dividends as the current rate is 7.5 per cent on dividends up to the basic rate band. Helpfully, the first £2,000 of dividends extracted individually is covered by the dividend allowance with no tax to pay.
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Before any dividends are to be declared, they must be checked to the articles of association to ensure that the internal rules of the company are kept in terms of who can approve these dividends and their proportions. Dividends will be approved via a board meeting.
There are two different types of