What are dividends?

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I would like to set up a company limited by shares. Based upon my research online, this appears to be the simplest and most common company structure, and sounds like it will suit the needs of my business quite well, indeed. I figured I would list myself as the sole shareholder of this company, but I am not too in tune with all of this shareholder jargon. What exactly is a dividend?

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A dividend is a distribution of company profits issued to shareholders. Shareholders receives dividend payments for each of their shares if the company has available profits to distribute. The size of the dividend payment is determined by the percentage of ownership represented by the share.

Most types of shares have dividend rights attached to them, but it is possible to issue shares that do not provide shareholders with the right to any company profits. Management shares and Alphabet shares can be issued without dividend rights.

Dividends can be issued at any time and as often as the company wishes. Payments are made from company profits after all taxes and liabilities have been accounted for, so the company pays 20% Corporation Tax on this income before it is distributed to shareholders. For this reason, shareholders do not pay any personal tax on dividends until their annual dividend income exceeds the threshold for the lower rate of Income Tax. Dividends are often used by company owners as a tax-efficient way to top up their director’s salary.

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