Demystifying dividends: a beginner’s guide

For many full-time contractors, the opportunity to earn a higher salary is among their main reasons for making the move. That, along with the freedom and enjoyment that comes with owning their own business.

If you’ve decided to set up your own Limited Company, you want to be certain it’s created in the most tax efficient way. After all, you’ll be working incredibly hard for your money, so you don’t want any more going to the tax man than has to.

Dividends are a great way to maximise the income you take from your business. If you’re not too sure of what they are, here’s an introduction:

 

In a nutshell…

Dividends are essentially a method of taking income from your business. They are payments made to the company’s owners – aka its shareholders – from accumulated profits, after business-related payments such as Corporation Tax and VAT have been made.

The main rule for withdrawing dividends is that your company must have enough ‘retained profit’ in the bank to cover them. Withdrawing dividends from untaxed earnings is illegal and, if caught, you could land yourself in serious hot water with HMRC.

Any profit that remains once you’ve withdrawn the dividends can stay in the account, where the money will hopefully accumulate over time.

 

What are the advantages?

The main benefit of drawing dividends from your Limited Company is that you won’t have to pay National Insurance Contributions (NICs), regardless of your Corporate Tax or Personal Income Tax rates. That’s why many business owners choose to pay themselves a modest salary, topped up with dividends.

 

Are there any disadvantages?

The only real drawback to dividends is that there must be profit in the business in order to declare them. If it’s not turning a profit, you’re still able to pay yourself a salary or bonus, even if it means you declare a loss – a situation you hopefully won’t find yourself in.

Taking dividends is something that must be decided on by every company shareholder, which could cause issues if there were multiple shareholders or an outside investor. Yet, these cases are unlikely to apply to you.

 

Who can dividends be paid to?

Dividends are separate to bonuses and salaries and can only be paid to the shareholders in the business. Many contractors will name a spouse as their shareholder, with dividends split depending on how much share capital each person owns. This can lead to even greater tax efficiency.

 

How are dividends taxed?

Dividends are taxed as personal income. The first £2,000 of dividend income is free of tax under the dividend allowance, with further dividends taxed at the following rates:

Within the basic rate threshold (income between £8,425 and £46,350 for 2018/19) = 7.5%

Within the higher rate (income from £46,351 to £150,000 for 2018/19) = 32.5%

At the additional rate (income exceeding £150,000 for 2018/19) = 38.1%

 

Find out more

Now you’ve got a clearer idea of what dividends are, there are rules to be aware of when it comes to declaring and balancing them with your salary. We thought it would be useful to put together a guide on combining salary with dividends for people making the move into contracting.

If you feel like you might need a helping hand setting up your business, the team at Intouch can help there, too. We’ll pair you up with your own expert Personal Accountant, who will help with everything from incorporating your company with HMRC, to setting up a business bank account, to insuring your company. Make the first step by calling our team today on 01202 375293.

 

 

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.

 

The top five contractor tips on how to get paid upfront

Get paid upfront

Limited Company contracting is fantastic in many ways – you’re your own boss, you can choose when you work and for how long, and have total freedom to design your professional career as you see fit. But like any great opportunity, there are still some downsides…

 

Not being paid on time is one of the unpleasant sides of contracting that almost everyone has experienced. Whilst it is considered the ‘nature of the beast’ by many contractors, there are some things you can do to avoid it. In this blog we show you the top five ways to prevent late payments.

 

1. Know how much you’re going to get paid

Seasoned contractors will know this point well, but if you’re just starting out then this is a valuable tip to adopt.

 

Never accept a contract that is yet to set out how much you’ll get paid – either as a day rate or total amount for the completed project in a set time frame. Whilst this may seem blatantly obvious, many contractors accept roles without scoping this out first, which can then lead onto either not being paid what they expected, or at all.

 

By doing so you’re showing the client that you understand their timescale, their expectations within that time period and how much they’re willing to pay for your professional time and skills.

 

2. Exude your professional presence

As a contractor it’s down to you to find your next contract. But remember that whilst you’re busy trawling job sites, speaking to previous clients and contacts, or liaising with other contractors, your potential clients are looking you up online.

 

Ensure your professional profiles (such as your LinkedIn profile or personal website) are up to date and display your experience and testimonials from completed contracts. If you look the part and mean business, you’ll be less likely to get messed around.

 

3. Charge deposits or milestone payments

A travel agent wouldn’t fly you out to a destination, let you stay in a hotel, then fly you home before taking payment – so why should contracting be any different?

 

Consider making an agreement with the client whereby a deposit is paid upon signing the contract, or lump sums of the final amount are paid in increments over the duration of the contract. That way you’re guaranteed payment for the work completed thus far and the client has faith that you will complete the job in full.

 

4. Haggle (but not by too much!)

Firstly, get a feel for how much clients are willing to pay for your skill set, experience and type of contract required to complete. Then, add 10-15% onto this amount.

 

When speaking to a potential client about your costs, pitch to them first with your inflated price and offer them a reduced price off your original cost. That way you’re showing the client that you’re willing to negotiate and you are considerate of their costs and budget restrictions, when in reality you are achieving your desired day rate without compromising.

 

This discount can also be applied to tip number three, whereby if your client agrees to a deposit or milestone payment, you could offer a discount to sweeten the deal.

 

5. Don’t ask – don’t get

Being upfront about payment and setting out parameters when it comes to guaranteeing payment can sometimes be tough, especially when you feel as though you’re telling the client you don’t trust them to pay you!

 

But remember it’s your livelihood you’re protecting, so don’t be afraid to speak up. Many contractors create written agreements with terms of engagement for their client to sign, which can remove the need to verbally discuss any potentially uncomfortable topics, so find what’s right for you.

 

Payment protection is key to a successful career in contracting

By setting out your own upfront payment strategies you’re protecting yourself against those clients who, for whatever reason, don’t pay you correctly or on time.

 

Why not try these five top tips when you win your next contract? You’ll never regret taking charge of your professional finances and will only gain confidence in becoming the contractor you want to be.

 

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.