Dividends are payments of a company's profits to its shareholders after accounting for all upcoming bills and tax liabilities.
Limited companies can legally only pay dividends to their shareholders if they have enough profit to do so. In other words, even if the company has enough cash in the bank, unless it's profit (after factoring in paying corporation tax), it is illegal to issue a dividend.
You can issue dividends from profits made in the current financial year, or from a previous financial year. To do so, company directors must 'declare' and record the declaration of dividends at a board meeting. The company will then issue a dividend certificate upon issuing and paying the dividends.
N.B. A platform like Mighty will automate showing you how much money is available to take as dividends as well as all the admin of declaring a dividend and issuing a dividend certificate.
To illustrate how much you can issue as dividends, let's take a simple example of a limited company that made a profit of £10,000 in the current year and has saved up of £30,000 of profits from previous years, on which Corporation Tax has already been paid.
Allowing for 19% Corporation Tax on the current year's profit (£40,000 * 19% = £1,900 Corporation Tax) the company will have £8,100 of profit after tax., The company can therefore pay a maximum of £38,100 in dividends to shareholders.
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