Dividends can sometimes be difficult to understand and many contractors find themselves wondering when they should take them and when they actually get taxed? In this blog we answer these two questions and cover 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?
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 2018, that was ‘payable’ on 7 April 2018, is included as income for the 2018/19 tax year regardless of when it is actually paid.
Remember! Should HMRC decide to investigate, in order to support all dividends, you should keep copies of all dividend vouchers and minutes. Your contractor accountant should have a dividend template for you to use, then you can 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 2018, the dividend allowance is £2,000. This applies for 2018/19. It’s worth taking at least £2,000 in dividends, as this amount is tax free, regardless of which tax band you fall into. Your contractor accountant will be able to review the level of dividend allowance available and amend this as necessary.
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 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.