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.

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.

Benefits vs dividends: what’s the best option?

Benefits vs Dividends

Business going well? Unsure how to reap the rewards of your hard work? Today we’re taking you through the most tax-efficient methods of extracting cash from your business.

As a business owner or director, it’s understandable that you want to reap the financial rewards of your venture’s success – and do so in the most tax effective manner. However, before you put your hand in the pot, it’s essential to consider both stakeholders and shareholders in the business. There’s little point in remuneration if extracting the cash is going to impact the business’s cash flow or affect shareholder profits. Benefits vs dividends – what’s the best option for you?

Dividends

Taking dividends from a business is by far the most common approach to extracting profit in a tax-efficient manner. Directors who are also shareholders can award themselves a salary in line with their National Insurance (NI) earnings limit, or whichever alternative level suits them, while supplementing their income through dividends. For the most part, dividends offer the most tax friendly approach to benefiting from corporate success, but there are other options which are worth investigation.

Benefits in Kind

Benefits in Kind, commonly abbreviated as BiKs, come in two forms. BiKs are either liable to income tax and NI or exempt from both. While some taxable BiKs remain a far more tax-efficient method of providing an income over taking a salary of equal value, for the most part, dividends remain much more tax-efficient than BiKs which are liable to tax. BiKs become an interesting option, however, when they’re tax and NI exempt.

BiKs: The pros and cons

Unlike dividends, which can be extracted as cash, BiKs are essentially a cash alternative – replacing costs you would otherwise incur out of your taxed salary. And unfortunately, in order to take full advantage of their value, they’re only tax-effective when applied to tax and NI exempt items. Limitations aside, tax exempt BiKs can still offer a highly attractive option, saving you and your business cash in a number of areas. Some of the most common tax exempt BiKs include free business lunches, pension contributions, emission-free vehicles and childcare to name just a few.

BiKs vs Dividends

So which presents the most tax-efficient option?

When it comes to extracting profits from your business, the advantages of taking a tax and NI free BiK can be worth considering over dividends – providing a more tax-efficient option in certain circumstances, maximising your earnings. In addition, unlike dividends which can only be paid when your business is in profit, BiKs can be taken regardless of your business’s financial performance. This makes them an ideal tax-efficient method of extracting value from fledgling businesses yet to turn a profit.

If you’re looking to extract profit from your venture and need some guidance from the professionals, look no further than Intouch Accounting. As expert contractor accountants, we can provide comprehensive advice on the most tax-efficient methods of reaping the rewards of your business. Contact us to find out more.

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.