Contractors' Questions: What about dividends and LLPs?

Contractor’s Question: How often can LLP members draw out dividends? And more generally in business, can dividends be drawn at any stage of the tax year, or is there a time when it’s always going to be more tax-efficient to draw them?

Expert’s Answer: Limited Liability Partnerships (LLPs) don’t pay dividends. Instead, members are taxed on their share of the profit of the LLP, in broadly the same way as individual sole traders – in other words they are taxed on what they earn, not on what they draw out.

Dividends paid by a ‘Limited Company’ – which is not a LLP but often shortened to ‘Ltd’ - to its members are quite different. We advise that there are three key points to remember about limited company dividends. 

First, you can only pay dividends if there are sufficient ‘distributable profits’ to cover them.  This isn’t the same thing at all as simply having enough money in the company bank account; and paying out dividends in excess of ‘distributable profits’ can get you into all sorts of trouble. If in doubt – talk to an accountant. 

Second, if a company has more than one shareholder, dividends usually have to be paid to all shareholders in proportion to the shares they hold (unless there are ‘dividend waivers’ or different classes of share – in which case take professional advice about how these work). 

Third, it’s important to get the formalities right when paying dividends: the necessary documentation isn’t very complicated – any accountant can provide templates - but it needs to be done properly if future difficulty with HMRC is to be avoided.   

Subject to those three points, you can pay dividends as often as you like – many contractors pay themselves dividends monthly. Finally, it doesn’t matter when in the tax year dividends are paid: neither the amount nor the timing of tax payable on dividends is affected by whether they are paid at the beginning or the end of the tax year.

The expert was David Whiscombe, tax technical director at BKL, a chartered accountancy firm.

Editor’s Note: Related Reading –

Contractors’ Questions: Is LLP best for Plan B?

Contractors’ Questions: Should I pay low or no salary alongside dividends?

Contractors’ Questions: How to make the most of unclaimed dividends?

Monday 30th November 2015