Sensible Dividends
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Equus

Original Poster:

16,980 posts

131 months

Monday 4th March 2019
quotequote all
We're approaching the end of our third year trading with a small Limited company, comprising 3 directors/shareholders and with a turnover currently just below the VAT threshold.

Two of the Directors invoice for the actual time they spend working on projects for the business, whilst the third (myself) draws a salary. For the last couple of years, we've also declared dividends such that none of us exceed the £5K tax free dividend allowance. This year, I'm thinking of declaring a rather larger dividend.

My question is; is there a sensible 'good practice' rule-of-thumb for calculating how much cash it is sensible to leave in the company bank accounts, to carry forward at the end of each year's trading (based on turnover, net profit, monthly outgoings, or whatever)?


(bugger: typo on the thread title - apologies)

PurpleMoonlight

22,362 posts

187 months

Monday 4th March 2019
quotequote all
It's £2,000 not £5,000 now.

Equus

Original Poster:

16,980 posts

131 months

Monday 4th March 2019
quotequote all
PurpleMoonlight said:
It's £2,000 not £5,000 now.
Ha! That's shows how much notice I take of tax updates!

None the less, same question still applies...

I should probably add that opportunities to reinvest profits are probably limited at the moment (I'm not inclined to pursue significant growth of the company at present) but stability of income - given the possibly implications of Brexit - is anybody's guess... though we've been pretty predictable, so far.

Edited by Equus on Monday 4th March 15:09

DB4DM

1,155 posts

153 months

Monday 4th March 2019
quotequote all
There are lots of potential variables here, what does your accountant advise?

PurpleMoonlight

22,362 posts

187 months

Monday 4th March 2019
quotequote all
I like to have enough cash in the bank to run the business for six months without any income.


Eric Mc

125,763 posts

295 months

Monday 4th March 2019
quotequote all
Are the directors all equal shareholders?

Equus

Original Poster:

16,980 posts

131 months

Monday 4th March 2019
quotequote all
DB4DM said:
There are lots of potential variables here, what does your accountant advise?
She doesn't... she's a bit vague.

PurpleMoonlight said:
I like to have enough cash in the bank to run the business for six months without any income.
Yes, I've been working on similar principles... I'm wondering if I'm being a bit conservative, though?

Eric Mc said:
Are the directors all equal shareholders?
No, 60/20/20 split (although we all have equal voting rights, and all get 'paid' an equal hourly rate for project work on behalf of the company).

DB4DM

1,155 posts

153 months

Monday 4th March 2019
quotequote all
It seems to me that if you 3 shareholders have equal voting rights then you are not able to unilaterally declare the dividend

Also I imagine that your cash float at the bank will depend on your business model, are you trading labour or stuff? Also on your risk "register" and appetite. For example is there a risk HMRC could bounce a tax demand on you? Does the company have debt, etc, etc. What does CF look like and all that

I can imagine if you've not discussed this in some depth with your accountant, she is right to be vague as there is no one size fits all


Equus

Original Poster:

16,980 posts

131 months

Monday 4th March 2019
quotequote all
DB4DM said:
It seems to me that if you 3 shareholders have equal voting rights then you are not able to unilaterally declare the dividend
True, but I'm very persuasive. smile

DB4DM said:
Also I imagine that your cash float at the bank will depend on your business model, are you trading labour or stuff? Also on your risk "register" and appetite. For example is there a risk HMRC could bounce a tax demand on you? Does the company have debt, etc, etc. What does CF look like and all that

I can imagine if you've not discussed this in some depth with your accountant, she is right to be vague as there is no one size fits all
We're an architectural design and planning consultancy, so trading labour (well, brains... I try not to do any actual physical work more strenuous than lifting a pencil). No debts, negligible risk of an unexpected tax demand.

Risk appetite is kind of why I'm asking the question... I'm naturally quite risk averse, but I'm wondering if I'm being excessively so.

anonymous-user

84 months

Monday 4th March 2019
quotequote all
Lots to consider

Here’s a couple of things i’d Include

6 months cash might be right, it might be too high, or too low. Nudge it to 5 this year, then 4 next if it can...

Shareholders’ income. Don’t waste the opportunity to take any of you up to a threshold. Mix hourly rate pay & divis to optimise the overall picture for company and shareholders

Other ways of removing money from the co. It doesn’t have to be a dividend. Pension contributions, BIK’d benefits that are sometimes best put through the co e.g health insurance, life insurance

And many more things to look at

AMST09

570 posts

210 months

Wednesday 6th March 2019
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Don’t you have to pay out dividends at the ratio the shares are held unless someone signs a waiver which isn’t necessarily that easy

Eric Mc

125,763 posts

295 months

Wednesday 6th March 2019
quotequote all
Correct.

And putting undue pressure on other shareholders is not allowed either.

Equus

Original Poster:

16,980 posts

131 months

Wednesday 6th March 2019
quotequote all
AMST09 said:
Don’t you have to pay out dividends at the ratio the shares are held unless someone signs a waiver which isn’t necessarily that easy
Yes, that would be the intention... what I'm trying to decide upon (and, yes, it would be agreed in discussion with my fellow Directors/shareholders, but you can trust me when I say that I don't anticipate that to be a problem) is the scale of the dividend in total.

gareth h

4,328 posts

260 months

Wednesday 6th March 2019
quotequote all
If you're concerned about retaining cash, divis can be declared but left in a directors loan account, this allows you to optimise tax allowances without worrying about leaving sufficient cash kicking about in the business.

Equus

Original Poster:

16,980 posts

131 months

Wednesday 6th March 2019
quotequote all
gareth h said:
If you're concerned about retaining cash, divis can be declared but left in a directors loan account, this allows you to optimise tax allowances without worrying about leaving sufficient cash kicking about in the business.
That's a thought... and something I wasn't aware of or that had occurred to me!

What would happen, in that case, if the Limited company ultimately became insolvent? Would the money belong to the director, or would it be claimed by creditors?

anonymous-user

84 months

Wednesday 6th March 2019
quotequote all
Equus said:
That's a thought... and something I wasn't aware of or that had occurred to me!

What would happen, in that case, if the Limited company ultimately became insolvent? Would the money belong to the director, or would it be claimed by creditors?
To some extent that depends on how the company became insolvent.

If the insolvency could be shown to be caused by a dividend policy that left the company potless, then the creditors would be after it. They probably would not get it, but they would try.

You don't have to do all or nothing on that either. You can declare a very full dividend and the company can pay out, say, two thirds now with the other third staying with the company as Directors' loan balances

Equus

Original Poster:

16,980 posts

131 months

Wednesday 6th March 2019
quotequote all
JPJPJP said:
To some extent that depends on how the company became insolvent.

If the insolvency could be shown to be caused by a dividend policy that left the company potless, then the creditors would be after it. They probably would not get it, but they would try.

You don't have to do all or nothing on that either. You can declare a very full dividend and the company can pay out, say, two thirds now with the other third staying with the company as Directors' loan balances
Thank you - and for your previous reply, which was equally valuable... indeed thanks to all: it may not seem it, but all comments have been genuinely helpful toward crystallizing my thoughts.

It would actually be pretty difficult for the company to become insolvent, without gross negligence/incompetence on my part, but leaving all or part of my dividend in a director's loan account sounds like a good compromise, and well worth thinking about.

Eric Mc

125,763 posts

295 months

Wednesday 6th March 2019
quotequote all
Equus said:
gareth h said:
If you're concerned about retaining cash, divis can be declared but left in a directors loan account, this allows you to optimise tax allowances without worrying about leaving sufficient cash kicking about in the business.
That's a thought... and something I wasn't aware of or that had occurred to me!

What would happen, in that case, if the Limited company ultimately became insolvent? Would the money belong to the director, or would it be claimed by creditors?
Directors cannot pay themselves before settling 3rd party debts. So there is a risk in not collecting dividends when the company was able to pay them.

gareth h

4,328 posts

260 months

Thursday 7th March 2019
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Be positive, you may not go bust!

gareth h

4,328 posts

260 months

Thursday 7th March 2019
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Said half in jest, many years ago I wasn't able to draw a salary for 18 months, a bit painful with a young family, however it does wonders for motivation, we worked through the hard times and became very profitable.