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Companies pay dividends to shareholders as members of that company. Normally, a company declares dividends annually at the Annual General Meeting (AGM). »Ê¹ÚÌåÓýapp dividend may be derived from both:

• capital profits (profits from investments); and
• profits from trading.

Shareholders may receive interim dividend payments between AGMs in anticipation of the final declaration. You should treat interim dividends exactly as final dividends.

Dividends are derived from a shareholding and not employment. »Ê¹ÚÌåÓýappy cannot therefore be classed as earnings and do not attract NICs.

For dividends to be lawful they must meet two conditions:

• the company must have sufficient profits to finance the dividend; and
• the dividends paid to shareholders, or to a particular class of shareholder, must be paid according to the rights laid down in the Articles of Association for that type of shareholding.

»Ê¹ÚÌåÓýapp onus is on the employer to show that dividends meet the conditions. However, even if the dividends do not meet these conditions, this is a matter which can only be taken up by the shareholders themselves under company law. »Ê¹ÚÌåÓýappre is no action open to you under social security legislation. »Ê¹ÚÌåÓýapp fact that a dividend has not met the requirements of company law does not make it earnings for NICs purposes.

To decide whether a dividend is genuine rather than a disguised payment of earnings, you need to see :

• the Memorandum and Articles of Association
• the Minutes of the meeting at which the dividend declaration was made; and
• the profit and loss account/balance sheet for the years in question.

For further information on dividends, see CTM15205