Why should I use Dividend Vouchers?

As a small business owner, you have several options for paying yourself, including a salary, dividends, or a combination of both. Dividends, which are distributions of profits to shareholders, are a popular choice for owners of limited companies due to their tax efficiency.

However, paying dividends isn’t as simple as transferring money from your company account to your personal account—it requires proper documentation, and this is where dividend vouchers come into play.

In this blog, we’ll explore what dividend vouchers are, why they’re essential for small business owners, and how to use them effectively.

What Are Dividend Vouchers?

A dividend voucher is a legal document that records the payment of dividends to a company’s shareholders. It serves as proof of the transaction and provides key details about the dividend payment, including:

• The date of the dividend payment.
• The name of the shareholder receiving the dividend.
• The amount of the dividend.
• The signature of an authorised company representative.

Dividend vouchers are typically issued whenever dividends are declared and paid. Alongside board meeting minutes approving the dividend, these vouchers form part of the official records of your business.

Why Should You Use Dividend Vouchers?

1. Compliance with Legal Requirements: Limited companies are required to follow specific rules when declaring and paying dividends. Dividend vouchers ensure that payments are properly documented, helping you comply with Company Law and HMRC regulations.
2. Proof of Dividend Payments: Dividend vouchers act as evidence of payments made to shareholders. This is particularly important during tax filings, audits, or disputes. Without proper documentation, HMRC could challenge the payments, potentially reclassifying them as salary, which would attract higher taxes and penalties.
3. Simplified Tax Reporting: Dividends are taxed differently than regular income. By using dividend vouchers, you can clearly separate dividend income from other types of income when filing your personal tax return. This simplifies your tax reporting and reduces the risk of errors.
4. Transparency with Shareholders: If your business has multiple shareholders, dividend vouchers provide transparency by clearly showing how much each shareholder is entitled to. This helps prevent misunderstandings or disputes.
5. Avoiding Reclassification Risks: If HMRC suspects that payments labeled as dividends are not legitimate (e.g., if they weren’t properly approved or documented), they may reclassify them as salary. This could result in additional tax liabilities, including National Insurance contributions. Dividend vouchers help demonstrate that the payments were lawful and properly processed.
6. Overall Governance: Proper documentation, including the issuance of dividend vouchers, reflects professionalism in your business operations. It shows that you adhere to best practices, which can be particularly valuable when dealing with investors or potential acquirers.

 

How to Create a Dividend Voucher

Creating a dividend voucher is straightforward and doesn’t require specialised software. You can use a template or generate one manually. A typical dividend voucher includes:

1. Company Details: Name, registered address, and company registration number.
2. Shareholder Details: Name and address of the shareholder receiving the dividend.
3. Dividend Details:
   • Date of the payment
   • Amount of the dividend
   • Class of shares (if applicable)
4. Declaration: A statement that the payment is a dividend.
5. Authorised Signature: Signed by a company director or authorised representative.

Once created, keep a copy of the voucher for your company’s records and provide a copy to the shareholder.

Common Mistakes to Avoid

1. Paying Dividends Without Sufficient Profits: Many small business owners pay themselves a regular amount each month by way of dividend, but much akin to a salary payment. This is fine when the business is continuing to trade profitably and build what is referred to as Distributable Reserves, but when trading conditions are variable this can present a misunderstood issue.Dividends can only be paid out of retained profits. Paying dividends when your business lacks sufficient profits is illegal and could lead to both financial and legal consequences.
2. Skipping Board Meeting Minutes: Dividends must be formally approved by the board of directors. Record this approval in meeting minutes to ensure compliance with corporate governance rules.
3. Confusing Dividends with Salary: Dividends are not a substitute for salary and should only be paid to shareholders. Ensure that you pay yourself a reasonable salary if you’re also an employee of the company.
4. Failing to Issue Vouchers: Some small business owners skip issuing vouchers altogether, assuming they’re unnecessary. This can create problems during audits or tax reviews.

Dividend vouchers might seem like an administrative chore, but they play a vital role in ensuring your business remains compliant and well-documented. For small business owners, they provide legal protection, simplify tax reporting, and foster transparency—all of which are crucial for the smooth operation of your company.

By incorporating dividend vouchers into your payment process, you’ll not only avoid unnecessary risks but also project a professional and organised approach to managing your finances. Whether you handle this yourself or work with an accountant such as us at MAP, ensuring proper documentation is an investment in your business’s long-term success.