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 one of our Personal Accountants, Neil Kellaway 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.
A dividend declared 1 April 2017, that was payable on 7 April 2017, is included as income for the 2017/18 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 2016, the new £5,000 dividend allowance was introduced and still applies for 2017/18. It’s worth taking at least £5,000 in dividends, as this amount is tax free, regardless of which tax band you fall into. We will review the level of dividend allowance available and amend this as necessary. 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.