Do I have to take a dividend payment?
There may come a time when your company is making enough profit to be able to pay dividends. But what if the share structure makes it tax heavy for an individual or what if the individual just doesn't want to take a dividend? There is a way that you can waive your right to a dividend.
What is a dividend waiver?
In simple terms, a dividend waiver is where someone opts not to be paid their dividend. Usually dividends are paid out at £x.xx per share and you get the same amount for each share owned.
There are several different time periods that you can opt to have waived and we'll look at each of these in more depth later in the post.
How do waivers work?
In order to make this more simple to follow, we'll use scenarios for this section.
Scenario 1 - The Dividend isn't needed
Let's say that there are 3 shareholders within the company holding 50, 25 and 25 shares, and it is proposed that £100 per share is paid in dividends. This means:
- Person 1 has £5,000 paid to them (50 x £100)
- Person 2 has £2,500 paid to them (25 x £100); and
- Person 3 has £2,500 paid to them (also 25 x £100).
However, person 2 has opted to waive their dividend. If this has been done correctly then the funds will be held by the company and persons 1 and 3 still get their entitlements as normal.
Will HMRC be interested in this?
Unsurprisingly, it's quite possible that they will. Because dividends can be taxed, HMRC will take a look at why the dividend wasn't taken by person 2. If it is found that the company wouldn't have had the funds available to pay out all the dividends unless a shareholder waived their rights then the company could be investigated further.
Scenario 2 - One person waives their rights and the other two take an increased amount
Take the above example but now Persons 1 and 3 can take an increased amount of £200 per share, meaning that they get £10,000 and £5,000 respectively. If it was found that the company couldn't have paid the increased amount without Person 2 waiving their dividend then HMRC may investigate this too, because the company couldn't have afforded the full amount in the first place.
This becomes a bit more complex when they're related. Let's assume Persons 1 and 3 are sisters. In this case, Person 1 has waived their right to the dividend and Persons 2 and 3 can take an increased amount. From HMRC's perspective, it may be seen that Person 1 is simply giving their income to their sister, Person 3.
I still want to waive my dividend - how do I do it?
If you have decided that you don't want to take your dividend then there is a process to follow to ensure that the correct records are kept.
- For final dividends, the waiver must be in place before the right to receive has arisen. For interim dividends the waiver must be in place before the money is distributed.
- A Deed of Waiver is required for all shareholders waiving their dividend. This needs to be signed, witnessed and returned to the company.
- The waiver can either be for a set period or it can be open ended.
Will HMRC investigate my company even if I've used waivers properly?
HMRC may take an interest in your company if they think that there aren't sound commercial reasons for waiving your dividend, for example, if they feel as though you're doing it for tax avoidance.
Dividends and waiving your rights to dividends can be a way to help keep money in the company and re-investing it for the future. However there are some things you need to take into consideration, for example, whether HMRC will investigate your company for doing so also whether your company can afford a different rate if one person has chosen not to take it.
Whether or not you choose to waive a dividend is up to the individual shareholder but the decision still shouldn't be taken lightly. Talk to your accountant or financial advisor if you feel that it's something you want to explore in the future and they may be able to offer further advice and alternatives.
The information provided in this post should be used for guidance only, and professional advice should be taken before any action is taken.
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