Dividend Allowance Query

[stoneyred]

I’m a bit confused by the advice I’ve been getting regarding dividend payments to myself and my wife (sole shareholders in a limited company) , and the actual amount we can pay ourselves without being liable for any additional tax on top of the corporation tax we pay and the PAYE I pay on my salary. The advice I got was the following:
· My Salary £24,000
· My Dividends: £16,236 per year (33% shareholder)
· My Wife: £32,964 per year (67% shareholder)
· The company profits for the year are around £100,000.
According to my accountant, this is the maximum amount we can take to ensure we pay no addition tax.
I was quite happy with this until a colleague of mine who is in an almost similar set up was told by his accountant that both his wife and himself could take £42,000 each out as dividends and pay no additional tax.
Can anyone steer me in which accountant is correct?
Thanks in advance

 

[Robert Pearce]

The answer should be that both accountants are right as they know the particular circumstances of their clients.

The higher rate threshold for 2012/13 is £42,475 so, in theory, an individual could have gross dividends of £42,000 (and no other sources of income) and not face a personal tax liability. If they took a salary, then the gross dividends that they could take would be reduced if they wanted to remain a basic rate taxpayer. In your case, you're saying that you take a £24,000 salary and gross dividends of £18,040 (being £16,236 x 10/9), which is £42,040 (i.e. just below the higher rate threshold).

 

[nelioneil]

Woo first post on UKBF

Anyway, as Rob pointed out, both accountants are technically correct with their assumptions. Generally, for a limited company director, paying a low salary upto the point where you start paying NI, but still get NI credits for state pension (I think its £624 a month for 2012/13) and the rest in dividends up to the basic rate band (including personal allowance of £8105) is the most tax efficient method of not paying tax! No NI or paye. Thats a very general example.

Remember though, there are risks to the apporach, which a lot of accountants fail to tell their clients. Dividends are paid only from distributable profits. If the company is not making profit, it cannot make dividends. So no one should be relying on paying just dividends and not taking a salary as well.

At the end of the day, it boils down to how much dividends you want to take out the business. Doing what is best for the business like retaining profits for next year, and reducing your own tax liability can be a conflict!

 

[JDL9000]

This may be a silly questioned, but doesn't dividends have to be paid out equally? So how can you receive around half the amount of dividends as your wife but the shares are split 33% / 67%?

 

[Paul_Rosser]

Dividends are paid based on the number of shares, so a £1000 dividend would be paid as £3,300 to one shareholder and £6,700 to the other.

However a shareholder can also waive their right to a dividend payment.

You can also have different classes of shares, which enables different dividend values to be paid to shareholders.

 

[Newchodge]

edit: Paul said it better

 

[David Griffiths]

However a shareholder can also waive their right to a dividend payment.

That is possible, but the waiver must be completed before the dividend is declared.

And even if it is done in advance, there can be some unfortunate personal tax consequences. Without going into detail, dividend waivers are best avoided completely, other than on very rare occasions

 

[Paul_Rosser]

Dividend waivers or share classes haven't been used here anyway as -

· My Dividends: £16,236 per year (33% shareholder)
· My Wife: £32,964 per year (67% shareholder)

Meaning a total of £49,200 was paid out in dividends, which works out at the individual payments above when looking at the % shareholding.

But as David said dividend waivers are best avoided if at all possible as the same can be achieved with different share classes, but takes some preperation in advance and for anyone interested your accountant should be able to advise.

 

[teddys]

dividend waivers.......as the same can be achieved with different share classes, [/SIZE][/FONT]

Even there it should be so planned as to escape the 'wholly and exclusively a right to an income' clause. Risky situations include e.g. as soon as you have posted large profits, you create alphabet shares without any voting rights!

 

[Blackberry]

is your wife taking a salary as well?

you'd be better off transferring the shares to be a 50:50 split and both taking a minimal salary and making it up with dividends - that way you could get to the £42k each without paying additional tax

 

[Paul_Rosser]

Even there it should be so planned as to escape the 'wholly and exclusively a right to an income' clause. Risky situations include e.g. as soon as you have posted large profits, you create alphabet shares without any voting rights!

Like I said

..but takes some preperation in advance