Dividends – how often should I take them, and when are they actually taxed?

Dividends

Dividends can sometimes be difficult to understand and many contractors find themselves wondering when they should take them and when do they actually get taxed?

 

In this blog our Director, Duncan Strike answers these two questions and covers the timing and tax point of dividend declarations.

 

Question 1: When are dividends taxed? Is it when they’re paid, or the date they’re declared?

 

Neither of these answers are correct. A dividend will be included on your tax return, according to the date the dividend was declared as becoming payable. The date it was paid is not relevant.

 

For example:

A dividend declared 1 April 2016, that was paid on 7 April 2016, is included as income for the 2016/17 tax year. The amount would be classed as a loan, if it was paid on 4 April, until 7 April. It would not change the tax year it’s regarded as a dividend.

 

Remember! Should HMRC decide to investigate, in order to support all dividends, keep copies of all dividend vouchers and minutes. Your contractor accountant should have a dividend template for you to use, then simply send them a copy every time you use it.

 

Tax planning opportunities

If you have some of your basic rate tax band left, have sufficient profits in your company and for whatever reason, you don’t want to pay yourself a dividend at that time, you’re able to declare a dividend immediately payable, if you intend to take the cash at a later date. This means you can fully utilise your tax allowances year on year, as it ensures the dividend falls into a specific tax year.

 

Don’t forget that as of 6 April, the new £5,000 dividend tax was introduced. It’s worth taking at least £5,000 in dividends, as this amount is tax free, regardless of which tax band you fall into. Use our new dividend calculator to find out how much you’ll pay in dividend tax this tax year.

 

Question 2: How often should you pay yourself dividends? What are the dangers of monthly payments looking like disguised salary?

 

We generally recommend our clients to pay themselves dividends, either monthly or quarterly. You can, however, pay them to yourself whenever you wish.

 

As long as the correct dividend voucher and minutes paperwork are in place and your company has sufficient funds to cover the distributions, there’s little chance that HMRC will see your dividends as salary.

 

We do advise all clients to keep their salary and dividend payments completely separate from one another and pay all shareholders separately in the correct proportions, so that a clear audit trail can be provided. Should you be subject to an HMRC review, having clear audit trails in place can make all the difference, as every item is easy to trace and nothing has been missed or hidden.

 

If you’re looking for specialist, tailored advice regarding dividends, that’s unique to you and your circumstances, speak to our team today to find out how Intouch can help you. Our Personal Accountants are here to be your guide, to ensure you get the best and most from contracting.

 

This blog has been prepared by Intouch Accounting. While we have made every attempt to ensure that the information contained in this blog has been obtained from reliable sources, Intouch is not responsible for any errors or omissions, or for the results obtained from the use of this information. This blog should not be used as a substitute for consultation with professional accounting advisers. If you have any specific queries, please contact Intouch Accounting.

Declaring dividend vouchers

Declaring dividend vouchers

When I declare a dividend must I also complete the vouchers and board minutes? For tax purposes when is that dividend actually paid? Do I need to take extra care before and after the 5 April? If I change my mind or don’t have enough profits to cover a dividend how do I correct it? How frequently can I pay dividends? Does it make a difference?

HMRC guidance states you must hold a directors meeting to ‘declare’ the dividend and keep minutes of the meeting. This is the case even if you are the only director of the company. You must also complete a dividend voucher with the required information.  If these conditions are not met you risk dividends being queried by HMRC. At worst the income could potentially be deemed as salary and would therefore attract all related taxes.

There are two types of dividend which are treated slightly differently. The first type is a ‘final dividend’ which is often one lump sum. For tax purposes a final dividend is deemed to have been received on the due date proposed by the directors, regardless of when the shareholders were actually paid. The second type is the one that most contractors use and is called an ‘interim dividend’. These usually consist of a number of amounts paid throughout the year. HMRC views interim dividends differently for tax purposes. This type of dividend is deemed as received only when it is actually paid. Dates for when interim dividends are payable can be changed by the directors in line with company profits.

Care should be taken with declaring dividends immediately before 5 April as this can affect which tax year HMRC will deem the income to have been received by shareholders. To avoid confusion think carefully about the ‘paid date’ if you are declaring dividends nearing year end. Even though a dividend may be declared before 5 April the shareholder might not bank it until after 5 April. HMRC would deem the income to belong to the previous tax year though, which can cause confusion and possibly increase tax liability. One way to remove doubt is to make the dividend ‘immediately payable’ on the proposed date.

If you change your mind about declaring a dividend it’s possible to hold a meeting to reverse the decision. If payment has already been made it’s possible to reverse this and turn the payment into a loan. The meeting minutes must clearly show the new decision and details. The important thing is to do this as soon as possible and ensure all records are complete and retained.

In theory you can declare dividends as often as you like. In practice it is not uncommon for contractors to declare dividends monthly or even less frequently. The most important thing is to fully complete the vouchers and documentation so as to reduce any risk that HMRC may argue frequent, regular dividends are in fact a salary, which is something to be avoided!

 

This blog has been prepared by Intouch Accounting. While we have made every attempt to ensure that the information contained in this blog has been obtained from reliable sources, Intouch is not responsible for any errors or omissions, or for the results obtained from the use of this information. This blog should not be used as a substitute for consultation with professional accounting advisers. If you have any specific queries, please contact Intouch Accounting.