Dividends - have I made a mistake?

[CupOfTea]

Good evening all,

As a sole director of a UK VAT registered Ltd company, I decided to pay a dividend of £3000 - 2 weeks ago (late July) and then now paid the same amount again.

So in total, that is £6000 dividend paid - as I understand it the company is liable for 20% tax on that?

So does that mean when the accounts are done, a £1200 bill for tax will be applied? Does that £6000 go towards my income in terms of tax code, so have I basically blown most of my tax free allowance before next April?

Appreciate any advice,

Ed

 

[Scalloway]

Your company will be due to pay 20% tax on its profits before dividends. This tax will be payable 9 months after the end of the financial year so you have time to accumualte funds to pay it.

Because the company has already theoretically paid tax on the dividend you will not have to pay any further tax unless your total income moves into the 40% tax bracket. If your company is your sole source of income it may be worthwhile to pay yourself a small salary.

 

[Adauxi]

As Scalloway suggests, your tax free allowance will be wasted if you receive only dividends. Something like £640 a month would be a good start.

 

[CupOfTea]

Ok, I kinda understand ( I think)

So here is another scenario...


User is paying himself £1000 a month (NET) as a monthly salary - and paying any PAYE/NIC that occurs.

However, in May, User paid £10,000 dividend to himself from the company.

Does this now mean that EVERY time user pays himself £1000 monthly salary, that he will be fully taxed on all income because the £9440 has been exceeded straight away by the dividends drawn in May?

(It's worth pointing out User has no intention of taking more dividends between now and the end of the financial year).

 

[Paul_Rosser]

How it works for most companies where the director is paid via dividends and up to their tax free allowance.

So say a company has £50k of turnover and spends £10k on allowed expenses, this leaves £40k.

The director/shareholder pays themself their tax free allowance of £9,440 split across the 12 months (£786 per month) on which there is no income tax or NI to pay, this can be deducted from the companys turnover leaving £30,560 as profit.

The company pays corporation tax at 20% on the £30,560 profit leaving £24,448 which can be paid as a dividend to the director/shareholder with no additional tax being required.

So the director/shareholder takes in total £33,888 without having to pay any income tax or NI.

The salary payments are made monthly and the dividend can be taken in bits across the year provided there is sufficent profit in the company after allowing for corporation tax.

If the director/shareholder takes dividends which push them into the higher tax bracket then they will have to pay additional tax, but if you have an accountant they should be able to advise.

 

[Tom McClelland]

The director/shareholder pays themself their tax free allowance of £9,440 split across the 12 months (£786 per month) on which there is no income tax or NI to pay, this can be deducted from the companys turnover leaving £30,560 as profit.

Payments above c. £646/month will attract NI contributions. So that is regarded by many accountants as the most efficient salary for an owner-director.

 

[Scalloway]

Ok, I kinda understand ( I think)

So here is another scenario...


User is paying himself £1000 a month (NET) as a monthly salary - and paying any PAYE/NIC that occurs.

However, in May, User paid £10,000 dividend to himself from the company.

Does this now mean that EVERY time user pays himself £1000 monthly salary, that he will be fully taxed on all income because the £9440 has been exceeded straight away by the dividends drawn in May?

(It's worth pointing out User has no intention of taking more dividends between now and the end of the financial year).

Tax on your salary is calculated monthly through PAYE. Each month you are allowed 1/12 of the £9440 tax free. Only when you do your tax return after 5 April will any tax on dividends be charged. In your example no further tax will be payable.

 

[Paul_Rosser]

Payments above c. £646/month will attract NI contributions. So that is regarded by many accountants as the most efficient salary for an owner-director.

You may want to consider paying a little bit of NI though as this will mean you get your stamp and also an accountant at a large practice told me it removes you from the HMRC searches when they look for people paying no NI.

 

[Newchodge]

You don't need to pay a little bit of NI to protect your pension contributions and SSP entitlement. This happens if you are paid £473 per month. Have a look here. http://www.hmrc.gov.uk/payerti/forms-updates/rates-thresholds.htm

Your pensions contributions and SSP are covered if you earn at the lower earnings limit; your employer starts to pay Employer's NI at the secondary threshold and you start to pay Employee's NI at the primary threshold.

 

[Paul_Rosser]

You don't need to pay a little bit of NI to protect your pension contributions and SSP entitlement. This happens if you are paid £473 per month. Have a look here. http://www.hmrc.gov.uk/payerti/forms-updates/rates-thresholds.htm

Your pensions contributions and SSP are covered if you earn at the lower earnings limit; your employer starts to pay Employer's NI at the secondary threshold and you start to pay Employee's NI at the primary threshold.

Excellent stuff, what about the HMRC checking people who pay no NI ? This accountant told me they do spot check so best to pay a little bit.

 

[teddys]

Excellent stuff, what about the HMRC checking people who pay no NI ? This accountant told me they do spot check so best to pay a little bit.

HMRC are always after tax leakage. Persons paying no tax or NIC are more likely to be picked up for scrutiny than the others. Take for e.g. vAT - if you keep claiming refund you're most likely to be picked up for review. In other Words HMRC class them into a 'risk' category. This is presumably what your accountant meant.

 

[Newchodge]

If you are legitimately paying no NI, then a spot check will not be a problem. Why pay taxes that are not due?

 

[Tom McClelland]

HMRC are always after tax leakage. Persons paying no tax or NIC are more likely to be picked up for scrutiny than the others. Take for e.g. vAT - if you keep claiming refund you're most likely to be picked up for review. In other Words HMRC class them into a 'risk' category. This is presumably what your accountant meant.

The number of small Ltd owners paying no NI on salaries just below the threshold is in the hundreds of thousands. The risk factor for inspection/check for this behaviour has to be invisibly small, or HMRC would be doing nothing else.

 

[Paul_Rosser]

If you are legitimately paying no NI, then a spot check will not be a problem. Why pay taxes that are not due?

Have you never been through an HMRC inspection ? They take ages, usually cost a fair bit and at the end of them when no issue is found you don't even get a card saying sorry.

 

[teddys]

Have you never been through an HMRC inspection ? They take ages, usually cost a fair bit and at the end of them when no issue is found you don't even get a card saying sorry.

HMRC, card, sorry ....is this 2050!!