Avoiding problems with dividend types

Tax timing

Distributing a company’s profits is typically done by paying dividends. The timing of this can be legitimately manipulated to delay when the shareholder is taxed. For example, a dividend paid soon after the start of the tax year gives the recipient nearly 21 months before the tax on it is payable. HMRC is aware of this and so may challenge the validity and timing of dividends if they aren’t properly declared and paid in accordance with company law.

Dividend procedure

There are two types of dividend, interim and final. Company law controls the procedure for paying each type. Both are taxable on the date on which they are “paid”, but the rules which determine this date aren’t the same.

Interim dividend

The payment date is when the money is “placed at the disposal of the shareholder”. For a director shareholder that is when the money is actually paid, e.g. by bank transfer to a shareholder’s account, or if earlier when the shareholder has the right to draw on the dividend, e.g. when the dividend is credited to the director’s loan account (DLA). It’s OK for the directors to declare a dividend and record it in the company’s minutes but if they want to delay the payment date, they should ensure they don’t record it anywhere in the company’s accounting records, e.g. as a credit in a DLA, until the date they want it to become taxable.

Final dividend

The due and payable date for a final dividend, which is also the date of payment for tax purposes, is when it’s approved by the shareholders in a general meeting. 

Example. A company’s financial year ends on 31 December. On 19 March 2021 the shareholders approve a final dividend proposed by the directors for the year ended 31 December 2020 but no date of payment is specified. For tax purposes, the dividend is treated as paid on the date on which the dividend was approved. This falls in the tax year 2020/21 and, under self-assessment, any the tax on the dividend is payable on 31 January 2022. However, the tax bill can be delayed by a year.

When approving a final dividend, specify when it is actually going to be paid. Record it in the company’s minutes. In the example above, if the minutes had shown that the dividend was to be paid on 6 April 2021 the shareholders would not have to pay the tax on it until 31 January 2023. If a director shareholder needs the cash sooner than the approved payment date they can take the money from their DLA earlier and this won’t change the date that the dividend is taxable. This should be done on the understanding that the dividend will be used to clear the DLA debt created when the shareholder drew the money.