This blog aims to give you some insight into taking a dividend from your company. Sometimes, clients ask us, “Is it better to take a salary of a dividend?” In most cases, a salary or bonus is better but not always and it will depend on the circumstances. The big advantage of salary is that it is a tax-deductible expense.
A dividend comes from after-tax profits and isn’t an expense in the Profit & Loss account. Yet, dividends play a role when taking money from your company. I’ll introduce you to Ted and Peg Legg who own Legg Up Limited. The main points we’ll cover are
- Introduction
- Dividend to avoid a surcharge
- Dividends to the children
- Dividends to Mike, Ben & Deborah
- Professional Services Surcharge
- Summary
Introduction
Ted Legg is 56 years old and owns 80% of Legg Up Ltd. He’s quite a guy. He met Peg Sayers, a Kerry lady who had a tough childhood, 30 years ago in a nightclub in Tullamore. With How Bizarre playing in the background their eyes met, and it was love at first sight. Ted was a young accountant at the time working in his father’s practice. He became a partner in the practice at 31 and transferred the business to a limited company when he was 40.
Peg owns 20% of the business and works part-time in payroll and HR. Currently, the business employs 20 staff and has a turnover of €2 million with an annual profit of €300,000. This would be after their salaries and pension contributions. The company has accumulated cash of €1.2 million and has a rental property that nets €40,000 in rent. This is for the year ended 31 December 2023
They have 3 sons Mike, Ben, and Tom, and 1 daughter Deborah. Tom is the youngest at 19 and is about to start college at UL. Mike is a stockbroker, living in London. Ben completed his accountancy exams and is working with PWC in Dublin. He’s planning to join the business when his contract ends. Deborah is 24 and is a qualified solicitor working for a US tech company in Dublin. She has no interest in the business.
Ted’s salary is €100,000 and Peg is on €35,000. Both have well-funded pensions.
Dividend to Avoid a Surcharge
It has been the policy to take a dividend to avoid a surcharge on the rental income every year. For close companies, those controlled by 5 or fewer people, there are specific rules. One of those is an extra tax charge, or surcharge, on investment income. A way to avoid the surcharge is to take a dividend. You calculate the surcharge as follows
| Rental Profit | €40,000 |
| Less Corporation Tax deduction – 25% | (€10,000) |
| Net after tax | €30,000 |
| Deduction for a trading company – 7.5% | (€2,250) |
| Amount liable to surcharge | €27,750 |
| Close company surcharge – 20% | €5,550 |
You’ll see between the tax of €10,000 and the surcharge of €5,550 that’s a liability of €15,550. The rate is close to 40%. To avoid a surcharge Ted and Peg can take a dividend of €25,750. There is no surcharge once the amount liable to it is €2,000 or lower.
Dividend Amount
The dividend amount that each take depends on their shareholding. There are 100 shares in issue so the dividend per share is €257.50. Ted has 80 shares and Peg has 20. Their gross dividend payments are
| Ted 80 shares x €257.50 | €20,600 |
| Less Dividend Withholding Tax | (€5,150) |
| Net Dividend | €15,450 |
| Peg 20 shares x €257.50 | €5,150 |
| Less Dividend Withholding Tax | (€1,288) |
| Net Dividend | €3,862 |
Timeline
The timeline to avoid the surcharge is within 18 months of the year-end. So, you must declare and pay a dividend at any stage during that 18-month timeline. For a 31 December 2023 year-end that goes to the 30th of June 2025. The Leggs decide to take the dividend in September 2024 to pay for Tom’s college costs.
Dividend Withholding Tax – DWT
The company must deduct Dividend Withholding Tax [DWT] from the payments at 25%. The company must make a DWT return to Revenue by the 14th of October 2024 and pay the DWT with that return. Included in that return are the company details, the recipient details, and the dividend. Plus, the amount of DWT deducted.
The company pays €15,450 to Ted and €3,862 to Peg in September. Then the company pays €6,438 to Revenue on or before the 14th of October.
Dividends to the Children
Ted would like to pay dividends to the children. For now, he can’t do that as they don’t hold any shares. He and Peg decide that they’d like to pay a gross dividend of €20,000 a year to each child. Their long-term thinking is that they like one of the kids to take over the business. As of now, Ben is the most likely, but Tom has potential. Whoever takes over the business won’t get a dividend. He would get extra salary to compensate for the loss of the dividend.
The Leggs see the annual dividend as a form of compensation to the children who are outside the business. It would be a means of getting some value to them while not giving any say to them in running the business. To achieve this, they create new shares in the company that are dividend access shares. These are as follows
- Tom 100 A Ords
- Mike 100 B Ords
- Ben 100 C Ords
- Deborah 100 D Ords
None of these shares carry any other rights so they have no voting rights or rights to assets on a winding up. The reason for the different classes of A, B, C, and D is that Ted and Peg can give a dividend to one child and not to another. For example, they could vote a dividend of €200 a share on the A Ords but not on the B Ords, and so on.
Dividend to Tom
After creating the new shareholdings, the company votes a dividend to Tom of €200 a share on the 31st of August 2024. They do this so Tom will use this money to pay for his college fees and accommodation. The dividend trail is
| 100 A Ords x €200 | €20,000 |
| DWT 25% | (€5,000) |
| Net payment to Tom | €15,000 |
Tom pays €3,000 for the course fee and €7,000 for campus accommodation. The company makes a DWT return and pays €5,000 to Revenue by the 14th of September 2024.
Tax implications for Tom
Receiving a dividend of €20,000 has tax implications for Tom. He’ll have to file a tax return for 2024 and pay tax on the dividend. But he’ll get a deduction for the withholding tax paid by the company. He has no other income in 2024 so his taxes will look like this
| Gross Income | €20,000 |
| Tax payable – 20% | €4,000 |
| Less Tax Credits | |
| Personal | (€1,875) |
| Rent | (€750) |
| Net Tax | €1,375 |
| Add PRSI & USC | €1,020 |
| Tax Liability | €2,395 |
| Less DWT deducted | (€5,000) |
| Tax Refund | (€2,605) |
Ted files Tom’s 2024 tax return early in 2025 so that he’ll get the refund in time for the January semester.
Dividends to Mike, Ben & Deborah
The Leggs decide to vote dividends to Mike, Ben & Deborah in 2025. They vote €200 a share on the C ords and D ords in January 2024 and €200 a share on the B ords at the end of April 2025. Mike wanted it that way as that income would fall into the UK tax year 2025/26.
Dividends to Ben & Deborah
The dividends to Ben & Deborah are the same as what Tom got a few months earlier. A gross dividend of €20,000 each and a net dividend of €15,000 with €5,000 each in DWT. The company will make a DWT return by the 14th of February 2025 and pay the €10,000 DWT deducted.
As they received the income in 2025 it will fall into the 2025 tax year. Both must file a tax return for that year by the 31st of October 2026 and pay any liability owing. As mentioned, Deborah is on a big number with the tech firm in Dublin. She will pay higher tax rates on the dividend. Ignoring her other income, her tax liability on the dividend will be
| Gross Dividend | €20,000 |
| Income Tax – 40% | €8,000 |
| PRSI & USC – 12% | €2,400 |
| Total Tax | €10,400 |
| Less DWT deducted | (€5,000) |
| Final Tax liability | €5,400 |
If we follow the cash, she got
| Amount received in Jan 2025 | €15,000 |
| Less final tax liability | (€5,400) |
| Net cash for Deborah | €9,600 |
The timing advantage is that she has €15,000 in January 2025 and has to pay the liability 22 months later in October 2026.
Dividend to Mike
The company can pay the dividend to Mike without deducting DWT. Provided the company has a completed Form V2A for him. They can do this as Mike is not resident nor ordinarily resident in Ireland. Mike would get that form certified by the UK HMRC to confirm he’s resident over there.
There is an exemption for non-resident individuals and companies once the correct paperwork is in place.
Professional Services Companies
A surcharge applies to professional services companies like the surcharge for investment income. The intention behind this is to get extra corporation tax from these companies. Traditionally these businesses paid large amounts of Income Tax as sole traders and partnerships. By transferring the business to a company structure the owners were going from a 50% tax rate to a 12,5% rate. The surcharge increases the rate closer to 20%. An example will make this clearer, I hope.
| Profits Leg Up Ltd year ended 31 Dec 2023 | €300,000 |
| Deduction for Corporation Tax – 12.5% | (€37,500) |
| Profits available for distribution | €262,500 |
| Less 50% | (€131,250) |
| Surchargeable amount | €131,250 |
| Surcharge 15% | €19,688 |
But as the company voted dividends of €80,000 within 18 months of the year-end it gets a deduction for those. The surchargeable amount reduces by €80,000 to €51,250. The surcharge on that at 15% comes to €7,688. That’s a saving of €12,000 in corporation tax or €80,000 at 15%.
Summary
There are many cash-rich companies out there. They’ll have different shareholders, and it can be difficult to keep everyone happy. A dividend policy could be a way of keeping non-active shareholders happy by ensuring they share in the company’s profits. They get a chunk of money that makes a difference to them. If this makes them happy then they may be less likely to have issues with the running of the company.
Even children, who don’t have shares, can get an income without you as the company owner losing control.
Do you want to make sure you and your company are looked after? If so, start here
