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.

Where does the ‘Budget for the future’ leave contractors now?

The Budget for the future?

It was billed as the Budget for the next generation, promising to offer long-term solutions to long-term problems. But what do Osborne’s plans mean specifically for contractors and freelancers?

 

After a weekend of media speculation, we tuned in at 12:30 today to find out exactly what the Chancellor had packed in the Red Box. Now we know. Here Intouch Accounting Director Duncan Strike, who is well used to unpicking the implications behind the announcements, identifies the three most important announcements affecting Limited Company contractors.

 

1. Personal service companies and the public sector

What transpired today was the announcement of a consultation that specifically targets contractors working through their own Limited Company for public sector bodies (including teachers and NHS workers).

 

In essence, if the consultation proceeds, this means:

 

  • the public sector body or agency paying the personal service company (PSC) must assess ‘employment status’
  • HMRC will provide ‘simplified tools’ for this purpose.

 

Furthermore, where employment status is found:

 

  • the fee due to the PSC, excluding VAT, will be reduced by 5%, then
  • Income Tax and Employee’s NI will be calculated and deducted before the PSC is paid
  • the PSC will no longer be responsible for Employer’s National Insurance (NI); this will be met by the client or agency
  • the combined deductions from the PSC and the Employer’s NI will be paid by the client or agency.

 

The proposed treatment of Employer’s NI is inconsistent with existing IR35 rules and it’s a wonder how this will be addressed in the final legislation. However, the principle of passing the Employer’s NI liability to the client or agency appears fair and likely to result in a proper consideration of status. Most consultations lead to legislation; it is reasonable to consider these changes will occur in substantially the way proposed.

 

It’s also likely that this or a separate consultation will look at IR35 further and in particular seek a simplified means of assessing status. We’ll be watching this space very carefully and reporting as the situation emerges and develops, as well as taking part in the debate.

 

2. Disguised remuneration and tax avoidance

For many years’ promoters of tax avoidance have offered tax schemes using Employee Benefit Trusts and loans to avoid Income Tax and NI. HMRC are to be given new rules that enable them to cancel out the tax advantage and possibly tax existing loans, remaining outstanding on 5 April 2019, in what might be considered a clever way of backdating the legislation. Contractors having used such schemes should be wary and prepare to consider the full effect as proposals develop into law.

 

3. Directors loans

The new dividend tax effective on 6 April 2016 means that dividends falling in the higher rate band will be taxed at up to 32.5%. Some commentators had identified that taking loans from your company may have offered a cheaper (tax) alternative.

 

The Chancellor has clearly identified this too and has now increased the tax on loans to directors or shareholders, taken from your company from 6 April 2016, to the same 32.5%..

 

Read more about the new dividends tax in our full ebrief.

 

We’ll be releasing our full Budget analysis tomorrow, specifically to help contractors and freelancers make sense of Osborne’s announcements. While we apply our expertise, tell us your initial thoughts about the Budget that Osborne believes puts family and future generations first.

 

Has George done enough to support small business owners? Share your reaction by leaving us a comment.

 

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.

Contractors urge Osborne to keep his focus in this week’s Budget

This week’s Budget

The pre-Budget media train has been in full motion over the weekend with genuine personal service companies (PSCs) all being wrongly tarred with the same tax avoiders brush. Trading through a personal service company is perfectly legal and above board. That is the correct starting point.

 

Surely if that premise was untrue all of these heinous crimes would have lead to fines or custodial sentences, or perhaps just changes to the legislation to catch the baddies. But that hasn’t happened.

 

FCSA is rightly pleading with Osborne to ”get his facts right before tarnishing all contractors with the same brush ahead of Wednesday’s Budget”. Contractors and freelancers are a valuable part of the UK’s workforce and those operating legitimately should not be punished as government look to clampdown on abusers.

 

Intouch supports tightening of the rules to make the system fair and just, but are singing from the same hymn sheet as FCSA in urging government not to attach genuinely independent workers who bring their highly valuable knowledge and experience into companies when they’re needed.

 

What’s likely to come up on Wednesday for contractors?

Contractors are already expected to deal with changes to the way dividends and expenses are taxed. Here’s what will be of interest on Wednesday lunchtime:

 

  • Dividends – the current tax credits will go and the new dividend tax kicks in on 6th April. Our Dividend ebrief tells you more about the new rules, what they mean and what you can do to make the most of your dividends.
  • Travel and subsistence expenses – any contractors who are under the supervision, direction or control (SDC) of their client will lose tax relief of their T&S expenses. This is likely to hit Umbrella workers the hardest as well as any contractors operating within IR35.
  • Stamp duty on second homes – any contractors with a second home will have to pay a 3% Stamp Duty surcharge.
  • IR35 – silence was golden in the Autumn Statement in which IR35 was put to one side. But we’re expecting it to raise it’s head again now Spring is here. The discussion document issued last year will most likely progress to consultation and we already know to expect an improved Employment Status Indicator Tool by the end of this year.
  • Income Tax threshold – it’s expected that the Personal Allowance will rise to £11,000. We also anticipate seeing the higher rate income tax threshold rise, probably to £43,000, as government continue to edge towards their longer term target of £50,000.
  • Company liquidations – changes likely to come into effect on 6th April mean any contractor looking to wind up their company but then continue contracting will have their distributions chargeable to Income Tax, rather than Capital Gains Tax. In short, this is a huge blow to the plans many contractors had to close down a company without perhaps retiring for good.

 

Other speculation

It’s more than likely that the Chancellor will continue with his focus on tax avoidance and clamping down on those who use marketed schemes to avoid paying their fair share.

 

Rumours are being leaked about Osborne reverting back to the old limit of 40p additional income tax rate band. It’s also unclear what the Chancellor will announce about pensions. While talk of major changes to the system of pension tax relief is making its way around the rumour mill, it seems more likely that there will be a reduction in benefits currently enjoyed by savers. If this proves true on Wednesday then now doesn’t seem like the right time to further reform pensions.

 

48 hours to go

With the Budget less than 48 hours away, the speculation will keep going round until the Red Box is opened in the House of Commons. We will be watching with interest and unpicking exactly what Osborne’s announcements mean for contractors. Make sure you’re in the know. Keep an eye out for our Budget special blog.


In the meantime, download our 2015/16 tax yearend ebrief to ensure you’re making the most of your money before 5 April.

 

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.

10 facts contractors need to know from today’s Finance Bill

The Finance Bill 2016 – why it’s good news for genuine PSC contractors…bad news for Umbrella workers, their clients and agencies.

Are you a contractor worried about changes to tax relief on travel and subsistence (T&S)? Concerned that you will lose out financially? The Autumn Statement announced that changes were on the way that could affect contractors/ freelancers. Today we’ve found out more and share what the changes in the law mean for Umbrella and personal service company (PSC) contractors.

 

Intouch is at the forefront of tax for contractors and Managing Director Paul Gough, with over 30 years experience in accounting and tax, has completed an initial analysis find out what the draft Finance Bill means to you.

In summary

PSCs who are truly independent and are not “disguised employees” (outside IR35) can still claim tax relief on T&S after April 2016.

 

This will not be the case for many Umbrella workers.

The relevant detail

Today’s publication of the draft Finance Bill 2016 sets out the detailed legislation and now makes these changes clearer:

  • If you are currently an Umbrella worker under the (or right of) supervision, direction or control (SDC) of the client or any party related to them then you cannot claim tax relief on T&S expenses from April 2016.
  • You are automatically deemed to be subject to SDC by HMRC; the Umbrella must determine otherwise with the help of the client.
  • Clients and agencies will have to provide information to help Umbrellas decide on the existence of SDC.
  • The only exception is where all services are conducted at the client’s home (domestic workers for instance).
  • If your employer (the Umbrella) gets this decision wrong then the Umbrella or its directors may have to pay any underpaid tax.
  • If your Umbrella does not pay the tax or the client or agency provide poor information they too may be on the line.
  • If you are an Umbrella worker not under SDC then you can claim T&S relief after 6 April 2016 (but not at source) unless new untested models work when wages are paid.
  • If you are a PSC (Limited Company contractor) and are outside of IR35 then it’s business as usual.
  • PSC contractors can claim T&S relief on travel to the client, and where they are outside of IR35.
  • If you are outside of IR35 then the SDC test is not applied – happy days!

 

HMRC has listened to stakeholders have made it clear with this draft legislation that PSC contractors working outside IR35 are indeed “self employed” and not the same as Umbrella workers.

 

They do enjoy different risks and rewards and as a consequence can claim tax relief for T&S costs.

 

So this is good news for anyone already running their own Limited Company or thinking about going Limited. For any Umbrella workers, it’s a good idea to start asking questions and consider your options so you aren’t forced into unwanted working practices come April 2016. In our next blog we’ll unpick what the Finance Bill 2016 means for contractors and give you ideas on actions you should consider.

 

Does today’s Finance Bill leave you more confident in contracting, or are you a worried Umbrella worker? Share with us how today’s announcements will affect you.

 

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.

How often can a Limited Company director draw dividends?

Drawing Dividends

Contractors are increasingly turning to forming their own Limited Companies rather than operating as sole traders or under Umbrella companies. This is in part due to the tax efficiencies available as well as the additional security it offers.

 

Why go Limited?

Whilst the ‘sole trader vs Umbrella company vs Limited Company’ debate is one which has been going on for quite some time and will continue to do so, the bottom line is that for many contractors, going Limited is the best approach. Why? Just a few advantages include:

  • Higher take-home pay
  • The ability to claim on a wider range of expenses
  • Flat Rate VAT Scheme entitlement
  • Security of personal assets
  • Greater control (when compared to using an Umbrella Company)
  • Better credibility
  • Greater tax planning opportunities

 

How do you pay yourself?

As a sole trader, the business’s money and the contractor’s personal money are one and the same. However, once a Limited Company is formed, these become separate entities and the money of the company and the contractor are separate, providing additional financial security.

 

In order for the contractor to ‘pay’ themselves as tax efficiently as possible, it is generally the case that they are paid a mixture of salary and dividends (depending on their circumstances and IR35 status), both of which should always be discussed with an accountant.

 

For those unaware, dividends are payments made to the owners of the company, ‘the shareholders’, from the company profit. Company profit is not only income less expenses for the current year, but also takes into account the Corporation Tax that will be due. It also includes any retained profits or losses brought forward from prior years. In some respects, dividends can be complex, however as a general rule, so long as the company has the money to be able to make the dividend payment and cover any tax and VAT due, there won’t be any issues.

 

One question which many contractors ask time and time again, however is:

 

How often can you draw dividends?

There are two types of dividend – Interim and Final. Interim dividends are those paid throughout the year, with Final dividends paid once annual accounts have been completed. Within a small company, the accounts are rarely complex, which means Interim dividends can be paid throughout the financial year. It is worth noting here that dividends are received on the date they are declared and, as such, it is important to consider the declaration date when declaring dividends close to the end of the tax year, as it can be an incredibly useful tax planning tool.

 

To answer the question asked however, it is important to understand that the frequency with which dividends are declared is much less important than whether they are legal or not. An illegal dividend, as outlined in The Companies Act 2006, Section 830, states that, ‘a company may only make a distribution out of profits available for the purpose’.

 

This simply means, that as long as a company is in a position to cover the dividend as well as their tax liabilities, the dividend can be legally declared. If declaring the dividend would result in the inability to satisfy tax and VAT obligations, it would be illegal and may result in repayment demands from shareholders (the contractor).

 

For many contractors, drawing a regular dividend is a sound way of financial planning; ensuring that your earnings are as tax efficient as possible and that a regular income is received. So long as the dividend is legal, the frequency at which they are drawn is down to the individual contractor’s discretion; something which is great news to contractors worrying that a dividend could perhaps only be taken at the end of a financial year.

 

For further advice on drawing dividends from a Limited Company, why not see our full guide, or for full financial planning support, give us a call today on 01202 375 562 to discuss how Intouch Accounting’s team of expert Contractor Accountants could help you make the most of your Limited Company.

 

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.

Changes to dividends – how will you be affected?

Changes to dividends

Announcements made in the Summer Budget mean that April 2016 will be an important period of change for Limited Company contractors. The current Dividend Tax Credit will be replaced with the new Tax-free Dividend Allowance and the headline rates of dividend tax are also changing. If you currently receive dividend payments or are considering doing so in the future, then you will be affected.

 

How should you prepare for these changes?

In our latest ebrief: Changes to dividends: what do they mean for you we explore:

  • what is a dividend?
  • the new dividend allowance
  • how dividends will be taxed
  • if pensions and ISAs will be affected
  • what your options are when taking dividends before and after April 2016
  • why these changes are happening

 

Knowing what’s just around the corner and how to prepare for it can ensure you’re in the best position come April 2016. Make sure you fully understand how these changes will affect you by downloading our latest ebrief.

 

Make the most of your dividends, be clear on where you stand.

 

When it comes to understanding the changes surrounding dividends, it’s wise to seek guidance and expertise from a contractor accountancy. Call us on 01202 375 562 to speak to one of our advisers now about the unlimited support our clients receive when new HMRC changes are announced and beyond!

 

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.

Dividends, share classes and dividend waivers

Dividends, share classes and dividend waivers

A dividend is money paid to a shareholder in return for their investment in a company.  Dividends can be paid monthly, quarterly or annually as the directors of the company see fit.  The only restriction is that the company must have profit available to pay out – management accounts are the best way to know whether that’s the case.

Dividends must be paid out in proportion to shares held, so if a company has 100 ordinary shares and declares a dividend of £10,000 each share will get £100.  Someone holding 25 shares will therefore receive £2,500 and someone holding 75 shares will receive £7,500.

There are two ways this can be changed to enable dividends to be paid in other proportions:

1. Split the shares into different classes

A company can have different classes of shares, known as Alphabet Shares, which can have different rights attached to them.  For example 100 shares could be split into 50 A Shares and 50 B Shares, with both classes having the right to dividends but only the B Shares having any voting rights.

Having different classes of shares enables the company to pay out a dividend on only one class.  It is then possible to pay the A shareholders without paying the B shareholders for example.

2. A shareholder waives their right to receive a dividend

A shareholder can waive their right to receive a dividend, basically saying “No thanks”, and certain paperwork then just needs to be completed and kept on file.

Both of these options should be used with caution, as there is a danger of the Settlements Legislation being applied (the old Section 660a, as made infamous by the Arctic Systems case).  HMRC guidance includes some factors they look for when considering if the legislation applies:

  • Disproportionately large returns on capital investments.
  • Differing classes of shares enabling dividends to be paid only to shareholders paying lower rates of tax.
  • Dividends being waived so that higher dividends can be paid to shareholders paying lower rates of tax.
  • Income being transferred from the person making most of the profits of a business to a friend or family member who pays tax at a lower rate.

 

If you are considering either of these options in order to pay different dividends to different shareholders you should talk to your contractor accountant for specific advice before going ahead.

 

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.

Dividends – when can you pay, what paperwork do you need to complete, when is it taxed?

Dividends – when can you pay, what paperwork do you need to complete, when is it taxed?

Taking money out of your Limited Company by paying dividends can be an extremely tax friendly way to extract and distribute the profit you’ve worked hard to earn. It’s important to make sure you’re doing this in the right way though to make sure you’re compliant with all legal and tax requirements. HMRC has strict rules on when you can pay out dividends from your company and you must also ensure that the correct paperwork and documentation is completed.

When can I pay a dividend?

You can only pay a dividend to shareholders if the company has made enough profit to do so. Usually you must pay dividends to all shareholders. Of course, if you are the only shareholder you simply pay yourself. You cannot pay out more in dividends than the company has made in profit either; the full dividend amount must already be available within the business. This means that you cannot pay dividends based on probable future profit; the money must come from funds which have already been earned in current or previous financial years.

You can take money out of your company even if you don’t have enough profit, but this is known as a Director’s Loan. For these a different set of tax rules and documentation requirements apply.

What should I be doing when I pay a dividend?

In order for the dividend to be valid you must:

  • Hold a director’s meeting where you officially ‘declare’ that a dividend is being paid out by your company
  • Keep a record of the minutes of the meeting, even if you’re the sole director (and remember these minutes are also essential to have if you’re selected for an HMRC Business Records Check).

You must also have the correct dividend paperwork in the form of a correctly completed dividend voucher. At Intouch we provide our clients with templates of these to make things easier. Each voucher must show:

  • Date
    The relevant date will depend on whether you are declaring an ‘interim’ or ‘final’ dividend. Your Intouch accountant can advise you on the correct date to enter in each case.
  • Company name
  • Name(s) of the shareholders being paid a dividend
  • Amount of the dividend
  • Amount of the ‘dividend tax credit’

This ‘credit’ means that your company and shareholders won’t have any tax to pay out when the dividend is paid. The individual shareholders may have to pay tax on the amount they receive though, depending on their overall annual income and the tax band they come under.

To calculate the dividend tax credit you simply divide the dividend amount by 9. HMRC gives the following example:

You want to pay a dividend of £900. Divide £900 by 9, which gives you a dividend tax credit of £100. Pay £900 to the shareholder – but add the £100 tax credit and record a total of £1,000 on the dividend voucher.

Again, your Intouch accountant can help you with this if you have any queries.

What about any income that’s inside IR35?

You cannot include any income earned inside IR35 as part of the profit you’re using to pay out dividends. Only income that is outside IR35 is allowable for this. Ideally you will already be absolutely clear on where the work you do sits in IR35 terms and should not have any issues with this. However, if you are at all unsure speak with your Intouch accountant for expert guidance.

Many contractors pay themselves dividends from their companies regularly throughout the year, so it’s a common business practice. With help from Intouch it needn’t be a problem to get it right, leaving you free to focus fully on what you do best.

 

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.