Understanding Dividends for Limited Companies: Interim vs Final

If you run a limited company and take money out as dividends, it’s important to understand the difference between interim and final dividends. It might sound technical, but it has real implications – especially when it comes to tax planning and timing.

In this blog, we explain the difference between the two, how they are treated for tax, and how to manage dividends for limited companies correctly.

What Are Interim and Final Dividends?

An interim dividend is a payment made during the company’s financial year. It’s decided by the directors without needing formal shareholder approval. Often, that’s just you – wearing both the director and shareholder hat.

To pay an interim dividend, you must ensure the company has enough profit, record the decision, and proceed with payment.

The key point is that an interim dividend only counts as paid when the shareholder receives the funds. That could be when it lands in your personal account or is credited to your director’s loan account.

Why does the timing matter? It’s mainly for tax. The dividend is taxed in the year it’s received – not when it’s declared.

A final dividend, however, is usually declared at the end of the financial year. Directors propose the amount, but shareholders must approve it before it can be paid.

Once approved, a final dividend becomes a legal obligation. Unless a later date is specified, it’s treated as paid on the day of declaration and approval. This timing can impact your personal tax depending on when you want the income to be recognised.

Can You Pay Dividends Monthly?

Yes, you can. There are no restrictions on how often dividends for limited companies can be paid. Many business owners choose to take monthly dividends – assuming the company has enough profit.

However, regular monthly payments of the same amount may raise questions from HMRC. They could appear more like a salary than a dividend.

To avoid issues:

• Properly declare and document each dividend

• Pay in line with shareholdings

• Issue a dividend voucher every time

How to Pay a Dividend – Step-by-Step

Here’s how to correctly issue dividends for limited companies:

1. Check the profits
   Review your statutory and management accounts to confirm sufficient distributable profits.

2. Hold a board meeting
   If you’re the sole director, write a note confirming you’ve reviewed the accounts and decided to pay a dividend. Include the amount, type (interim or final), and payment date.

3. Get shareholder approval (for final dividends)
   This requires a written resolution or general meeting. If you’re the only shareholder, sign a short written approval.

4. Issue a dividend voucher
   The voucher must include the company name, shareholder name, dividend amount, payment date, and a copy for your records.

5. Record the dividend
   Record the transaction in your accounting records. If paid into a loan account, ensure entries reflect this accurately.

Final Considerations

Check your company’s articles of association and any shareholder agreements before paying dividends. These may include specific rules or restrictions. Also, not all shares carry dividend rights – be clear on the rights attached to each share class.

Dividends are a tax-efficient way to extract profits – but only when handled correctly. Keep records accurate, document all payments, and regularly review your accounts.

If you’re unsure about profit levels or how a dividend will affect your tax, speak to your accountant. Spending a few extra minutes to do things properly can save you unnecessary stress – and tax – later on.

How Lewis Brownlee Can Help

At Lewis Brownlee, we help company owners make smart, tax-efficient decisions about their income. Our expert advisers can guide you through the process of declaring dividends, checking profit levels, and understanding the impact on your personal tax.

Whether you’re a new director or a seasoned business owner, we’re here to ensure you stay compliant and confident in your decisions.

Get in touch with our team on the South Coast today for friendly, professional advice on managing dividends and all aspects of your company’s finances.