Planning Dividends with Figurewizard
As dividends come out of cash flow, liquidity and equity they need to be planned and forecast, which is what Figurewizard’s dividend calculator is for.
Entering the dividend value and payment date updates the forecast month by month bank plus undrawn financial facilities as well as forecst year end movements for working capital, equity and external financing.
This all happens on the same screen and updates in real time.
Dividend Documents
Distributing profits to shareholders have to be formally recorded by a board resolution and recorded in the minutes. This applies even if there is only one director / shareholder drawing dividends. National insurance does not apply to dividends.
Once declared, dividend certificates must be issued citing the name of the company, the date, the name of the shareholder entitled to the dividend and the value of the dividend tax credit. The value of the tax credit is purely notional and is added to the cash value of the dividend to arrive at a shareholder's gross taxable value.
Dividend Tax Credit
The cash value of the dividend is divided by nine to calculate the tax credit's value. For example:
| Cash Value of Dividend | £9,000 |
| Divide by 9 (i.e. dividend tax credit) | £1,000 |
| Gross Taxable Value of the Dividend | £10,000 |
How Dividends are Taxed
Taxable earned income is first assessed for income tax. For example a shareholder with gross taxable earned income of £20,000 for 2013 / 2014 will have £12,010 (£32,010 less £20,000) left of their basic rate tax threshold to apply to gross taxable dividends.
| Tax Threshold (2013 / 14) | Gross Rate | Tax Credit | Net Rate | % of Cash Value |
| To £32,010 | 10.0% | 10% | 0.0% | 0.0% |
| £32,010 - £150,000 | 32.5% | 10% | 22.5% | 25.0% |
| Greater than £150,000 | 42.5% | 10% | 32.5% | 36.1% |
Dividends and Solvency
The UK Companies Act requires directors to exercise "reasonable care, skill and diligence." In the US this is generally referred to as a "duty of care." These are obligations in law.
Nothing is more important in this respect than protecting the balance sheet. If dividends subsequently result in net assets (equity) going into deficit, the business becomes balance sheet insolvent. However the real danger is much more likely to show up well before that if unsustainable dividends create liquidity and therefore cash flow problems.
Dividends and Liquidity
Cash flow insolvency is by far the most common cause of business failure and often this arises from past inappropriate dividends. It is not good enough therefore to conclude that current profits and available reserves are alone sufficient grounds for issuing dividends if the end result is that the business starts to default on its payments.
When deciding on dividend levels, balance sheet equity and working capital must always come first. That will call for careful planning and forecasting if directors are not to breach their duty of care by putting the business at risk of insolvency. Online planning and forecasting of this kind are what Figurewizard.com specialises in.
What if I draw the dividend but do not take it out right away?
@ Rodders
If you issue dividends and borrow the cash to fund that, your liquidity still falls by the value of the amount borrowed. Yes - you are putting the cash back with borrowed money but you are then also adding an equivalent amount of debt, so the cash taken out as a dividend remains as a charge to both liquidity and solvency.
Keeping the cash in the business will help cash flow but it will also increase current liabilities and therefore reduce working capital. Your bank manager won't like it if working capital ratio then becomes too close for comfort.
I draw a small salary and rely on dividends to make up the rest of my personal income. I only draw dividends from profits as you say but what is wrong with financing them from the overdraft to keep liquidity?