Director's dividends

[KevinJackson]

1 - What is the common practice for a director [small limited company with two employees, Director is the sole shareholder] to take dividends from company's account in terms of frequency. I know that practically speaking a director can take money any number of time any day of the year but I would like to know the common practice?

2 - Do I really needs to create dividends voucher for the money I am going to transfer to personal account?

3- What should I call this bank transaction when I am transferring the money from business account(Transaction reference)? For instance ,should I call it "Winter dividends" or "directors dividend",....?

 

[Gordon - Commercial Finance]

1 - What is the common practice for a director [small limited company with two employees, Director is the sole shareholder] to take dividends from company's account in terms of frequency. I know that practically speaking a director can take money any number of time any day of the year but I would like to know the common practice?

2 - Do I really needs to create dividends voucher for the money I am going to transfer to personal account?

3- What should I call this bank transaction when I am transferring the money from business account(Transaction reference)? For instance ,should I call it "Winter dividends" or "directors dividend",....?

1. Its really up to you. It can be daily if you like, but that would be a lot of paperwork. I used to do one monthly but changed to less frequent a while back.

2. Yes you need to create a dividend voucher for every dividend and also have minutes of a board meeting where the dividend was declared. Because of this, you may want to go as infrequent as possible as 12 of these a year can be a bit time consuming.
An easier way to do it would be to advance yourself a directors loan (assuming the company can afford it) and then clear that off by paying a dividend at the end of the quarter or end of year to the directors loan account.

3. Something that would make it easy for your accountant to identify. Through the year, INTERIM DIVIDEND would do. Or if you follow my advice above then DIRECTORS LOAN.
Whatever you do, don't use the "Directors Dividend" reference that you suggest above. Dividends are not paid to directors, they are paid to shareholders.

 

[Lisa Thomas]

1. Excuse my sarcasm but from what I see common practice is that Directors take regular drawings every month without raising any resolutions, minutes, dividend vouchers or documents to support that the Company has sufficient reserves at the time of each draw.

Then they get to the end of the year and ask the accountants to retrospectively treat the drawings as dividends.

Then the accountants find that they can't treat all of the drawings as dividends because the Company didn't have sufficient reserves for dividends to be declared and was/is insolvent and the director is therefore a debtor to the company for the drawings.

Then the Company enters Liquidation and the Lqr pursues the Director for repayment.

2. Yes you need to draw up and maintain full records for each draw.

3. I have no idea what a 'winter dividend' is?!

I recommend you get proper advice from an accountant to sort all of this for you as it could be an expensive lesson if the Company becomes insolvent.

 

[KevinJackson]

1. Excuse my sarcasm but from what I see common practice is that Directors take regular drawings every month without raising any resolutions, minutes, dividend vouchers or documents to support that the Company has sufficient reserves at the time of each draw.

Then they get to the end of the year and ask the accountants to retrospectively treat the drawings as dividends.

Then the accountants find that they can't treat all of the drawings as dividends because the Company didn't have sufficient reserves for dividends to be declared and was/is insolvent and the director is therefore a debtor to the company for the drawings.

Then the Company enters Liquidation and the Lqr pursues the Director for repayment.

2. Yes you need to draw up and maintain full records for each draw.

3. I have no idea what a 'winter dividend' is?!

I recommend you get proper advice from an accountant to sort all of this for you as it could be an expensive lesson if the Company becomes insolvent.

In regards to the third question, What I meant was the name of the transaction. What do you call this transaction [ the name it appears in your bank account statement ] when you transfer dividends money to your personal account? "director's dividends", "birthday dividends", "winter dividends",.....? What would you call it?

 

[UK Contractor Accountant]

3. I have no idea what a 'winter dividend' is?!

you pay these when the temperature drops below 5 degrees.

 

[Lisa Thomas]

In regards to the third question, What I meant was the name of the transaction. What do you call this transaction [ the name it appears in your bank account statement ] when you transfer dividends money to your personal account? "director's dividends", "birthday dividends", "winter dividends",.....? What would you call it?

If the Company was actually paying a declared dividend to its Shareholders I would only ever expect it to be named Dividend Dividend (or Director Loan Account per the advice from Gordon above) and posted to the relevant Nominal Ledger in the accounting system.

 

[TheCyclingProgrammer]

I pay mine quarterly as I find it the best balance between paperwork and personal income/cashflow (I do my personal budgeting up to 3 months in advance and it works well for me).

It is important that every time you declare a dividend you a) ensure you have sufficient retained profits to pay a legal dividend b) record the intention to pay a dividend with company board minutes and c) issue a dividend voucher (it's the equivalent of a payslip and is for your own personal record). Fulfilling a) should be easy if you have online bookkeeping software that gives you a real-time overview of your company's financial position. Software like FreeAgent will also take care of b) and c) (although for multiple shareholders its paperwork is a bit...lacking).

Use whatever you like for the bank transfer reference but it makes sense to use something descriptive. I use SALARY, DIVIDENDS and EXPENSES whenever I pay one of these three things to myself so it's very obvious.

Be careful with the "treat it all as a director's loan and pay it off as a single dividend later" approach - partly for the very good reasons Lisa has already mentioned and also because you may inadvertently find yourself creating a BIK liability if you exceed £10k (this is the threshold for interest free, BIK free director's loans).

 

[mattk]

In regards to the third question, What I meant was the name of the transaction. What do you call this transaction [ the name it appears in your bank account statement ] when you transfer dividends money to your personal account? "director's dividends", "birthday dividends", "winter dividends",.....? What would you call it?

Maybe I lack creativity, but I call mine "Dividend".

 

[Gordon - Commercial Finance]

Maybe I lack creativity, but I call mine "Dividend".

I call mine VIKING DIVIDEND because I'm a Viking.

 

[SteveHa]

Director's don't take dividends! Dividends are only paid to shareholders. There is no such thing as a "Director's dividend".

And, yes, you need to create vouchers for each (and you should also have a resolution voting the dividends), otherwise, without, where the director is a shareholder but dividends are not properly documented, the withdrawals may simply be debits to the director's loan account, and subject to S455 tax, as well as potentially giving rise to a taxable benefit in kind.

Whilst the S455 tax could be reclaimed by later clearing the DLA with a dividend, this can create a cash flow issue for the company in the intervening period.

 

[MyAccountantOnline]

1 - What is the common practice for a director [small limited company with two employees, Director is the sole shareholder] to take dividends from company's account in terms of frequency. I know that practically speaking a director can take money any number of time any day of the year but I would like to know the common practice?

2 - Do I really needs to create dividends voucher for the money I am going to transfer to personal account?

3- What should I call this bank transaction when I am transferring the money from business account(Transaction reference)? For instance ,should I call it "Winter dividends" or "directors dividend",....?

1. I look after the accounts and tax for quite a few small companies and I'd say its an equal split of monthly and quarterly for the ones I look after. I personally pay a dividend each quarter.

2. Yes you should. It really doesn't need to take more than a minute - just use a standard voucher and minutes and amend them for each payment.

3. 'Dividend' is all you need to show.

 

[MyAccountantOnline]

Director's don't take dividends! ....

Yes they do if they are also shareholders and you can indeed have a directors dividend if the director is a shareholder

 

[SteveHa]

Yes they do if they are also shareholders and you can indeed have a directors dividend if the director is a shareholder

No, they don't get the dividend because they are a director. They get the dividend because they are a shareholder. Their being a director is immaterial.