Changes to Dividend taxation
Discussion
Cobnapint said:
Quick question, do you have to declare dividend payments on the tax return for the tax year they were announced in, or paid in?
Paid - but "paid" can be deemed to be more than just the passing over of cash. For example. If a dividend is shown in a set of accounts and the journal entry to create the transaction in the records is -Debit "Final Dividend"
Credit "Accruals"
That will not be looked on as a "paid" dividend. An "accrual" is a provision of a cost which has not yet become a legal obligation to pay. In other words, it is a provision for an anticipated or future liability of teh company.
If a dividend is shown in a set of accounts and the journal entry to create the transaction in the records is -
Debit "Final Dividend"
Credit "Director's Current Account"
This WILL be treated as having been paid.
Once the liability has been credited to the director's account, it has become an actual liability of the company.
JonRB said:
Eric, I think you are completely missing what I was saying. I wasn't saying that those court cases are gossip and rumour. I wasn't saying that I disbelieved you. I wasn't throwing any doubt on their veracity at all.
All I was saying that I had heard reports and anecdotal conversations about things that had happened in my industry, and that I was making the caveat that I had not personally researched the veracity of what I was posting.
Obviously you are stating you've heard rumours - which, being rumours, may or may not be true. All I was saying that I had heard reports and anecdotal conversations about things that had happened in my industry, and that I was making the caveat that I had not personally researched the veracity of what I was posting.
What I am saying is that you don't need to be concerned about such rumours. there is plenty of employment and tax case law to fill your boots with genuine decisions on what constitutes employment or self employment. Indeed, the case law on this whole subject dates back right to Victorian times and it is amazing that after over 100 years of such cases, we still can't always tell whether a person is an employee or self employed in some situations.
Eric Mc said:
Paid - but "paid" can be deemed to be more than just the passing over of cash. For example. If a dividend is shown in a set of accounts and the journal entry to create the transaction in the records is -
Debit "Final Dividend"
Credit "Accruals"
That will not be looked on as a "paid" dividend. An "accrual" is a provision of a cost which has not yet become a legal obligation to pay. In other words, it is a provision for an anticipated or future liability of teh company.
If a dividend is shown in a set of accounts and the journal entry to create the transaction in the records is -
Debit "Final Dividend"
Credit "Director's Current Account"
This WILL be treated as having been paid.
Once the liability has been credited to the director's account, it has become an actual liability of the company.
Eric, but presumably you can't "have your cake and eat it" by "paying" the dividend to the director current account in 2015/16 but the director drawing the payment from his Director Account in the 2016/17 year?Debit "Final Dividend"
Credit "Accruals"
That will not be looked on as a "paid" dividend. An "accrual" is a provision of a cost which has not yet become a legal obligation to pay. In other words, it is a provision for an anticipated or future liability of teh company.
If a dividend is shown in a set of accounts and the journal entry to create the transaction in the records is -
Debit "Final Dividend"
Credit "Director's Current Account"
This WILL be treated as having been paid.
Once the liability has been credited to the director's account, it has become an actual liability of the company.
Yes you can.
The posting of the dividend to the director's current account is de facto the payment. By doing that, you have created an obligation by the company to make the payment - just like the fact that the processing of a purchase invoice from a supplier creates an obligation by the company to pay that bill.
The posting of the dividend to the director's current account is de facto the payment. By doing that, you have created an obligation by the company to make the payment - just like the fact that the processing of a purchase invoice from a supplier creates an obligation by the company to pay that bill.
....so would that director (in 2016/17) be taxed on the income and the dividend, or would the dividend be then not subject to dividend tax because it was "paid" in the 2015/16 year???It depends on the accounts being prepared and the date the posting to the director's loan account was made.
For example, say a company has a financial year end of 31 December 2015. In the run up to the year end the company reviews its profit situation and decides that it can afford to vote a dividend of £20,000 to its sole shareholder/director.
An adjustment is made in the accounts, dated 30 November 2015 providing for the £20,000 dividend and crediting the director's loan account accordingly.
The director does not withdraw any cash from the company bank account until 31 May 2016. In which Self Assessment tax year does the director have to show the dividend?
The answer is 2015/16. Even though the cash was not withdrawn until after 5 April 2016 i.e. in tax year 2016/17, the transfer of the obligation to pay him was made on 30 November 2015 which falls within the 2015/16 tax year.
For example, say a company has a financial year end of 31 December 2015. In the run up to the year end the company reviews its profit situation and decides that it can afford to vote a dividend of £20,000 to its sole shareholder/director.
An adjustment is made in the accounts, dated 30 November 2015 providing for the £20,000 dividend and crediting the director's loan account accordingly.
The director does not withdraw any cash from the company bank account until 31 May 2016. In which Self Assessment tax year does the director have to show the dividend?
The answer is 2015/16. Even though the cash was not withdrawn until after 5 April 2016 i.e. in tax year 2016/17, the transfer of the obligation to pay him was made on 30 November 2015 which falls within the 2015/16 tax year.
A quick query...
The tax credit system his being abolished if I read correctly? As it stands, and as an example, a £27k dividend netts to £30k so with a £12k basic salary a director would be earning £42k - which is under the higher rate tax band.
With the abolition of the tax credit does this mean that you could declare a £30k div and pay £1,875 div tax therefore receiving a similar amount (£28,125 dividend after tax)? Ok you pay the additional tax but if aiming to stay under the higher rate you would effectively receive approximately the same amount in the tax year.
The tax credit system his being abolished if I read correctly? As it stands, and as an example, a £27k dividend netts to £30k so with a £12k basic salary a director would be earning £42k - which is under the higher rate tax band.
With the abolition of the tax credit does this mean that you could declare a £30k div and pay £1,875 div tax therefore receiving a similar amount (£28,125 dividend after tax)? Ok you pay the additional tax but if aiming to stay under the higher rate you would effectively receive approximately the same amount in the tax year.
Edited by CRB14 on Thursday 16th July 16:35
The dividend received will now count as income for assessment against the income tax bands.
So yes, you can draw slightly more dividends without hitting the 40% tax band. But at no point are you actually better off under the new system. There is a net gain for about £3000 of dividends where 25% tax would have been paid but now only 7.5% is but this doesn't offset what will be payable and isn't now.
So yes, you can draw slightly more dividends without hitting the 40% tax band. But at no point are you actually better off under the new system. There is a net gain for about £3000 of dividends where 25% tax would have been paid but now only 7.5% is but this doesn't offset what will be payable and isn't now.
PurpleMoonlight said:
The dividend received will now count as income for assessment against the income tax bands.
So yes, you can draw slightly more dividends without hitting the 40% tax band. But at no point are you actually better off under the new system. There is a net gain for about £3000 of dividends where 25% tax would have been paid but now only 7.5% is but this doesn't offset what will be payable and isn't now.
Thanks, I know I'm worse off - was just trying to get my personal incomings straight in my own head. So yes, you can draw slightly more dividends without hitting the 40% tax band. But at no point are you actually better off under the new system. There is a net gain for about £3000 of dividends where 25% tax would have been paid but now only 7.5% is but this doesn't offset what will be payable and isn't now.
PurpleMoonlight said:
By my calculations, if you take your personal allowance via PAYE and then £32,000 dividends on top you will currently pay £830 tax on the dividends whereas next year, and using the same assumptions, you will pay £2025 tax.
So a loss of £1195.
Sounds very reasonable to be honest!So a loss of £1195.
PurpleMoonlight said:
By my calculations, if you take your personal allowance via PAYE and then £32,000 dividends on top you will currently pay £830 tax on the dividends whereas next year, and using the same assumptions, you will pay £2025 tax.
So a loss of £1195.
Yes my calcs show the same.So a loss of £1195.
Only winners are those paying higher rate tax with dividend income less than £5k - this will now be tax free so potential saving of £1250.
David
I was speaking to the "lads" in the pub about this over lunch yesterday and one mentioned that his accountant has a way around this by incorporating a company in for e.g Dubai and selling your own UK ltd company to this offshore company. I'm not an expert with all this so lost the plot a few mins after he begun to speak but there were some big gasps and ohhs and ahhs so it seems he was talking sense. Eric may know more about what he was intending to say just by hearing the word "offshore".
W4NTED said:
I was speaking to the "lads" in the pub about this over lunch yesterday and one mentioned that his accountant has a way around this by incorporating a company in for e.g Dubai and selling your own UK ltd company to this offshore company. I'm not an expert with all this so lost the plot a few mins after he begun to speak but there were some big gasps and ohhs and ahhs so it seems he was talking sense. Eric may know more about what he was intending to say just by hearing the word "offshore".
If you control the company that is based in a low tax jurisdiction then you have to account for the profits on your UK tax return as if it was a UK company (or near as damn it)Eric Mc said:
"Overseas" solutions are always thrown up when a tax hike occurs. There are many and varied versions of these - none of which I would ever want to get involved in.
Eric what's the professional opinion on building up a pot of cash in a company and then closing it down and getting money out via the CGT route, the limits is 11K I think, so a couple with equal share could take £22k tax free and their £10k dividend limit tax free. Is there rules or an eye on how many companies you could incorporate over a few years? It's a bit of a ball ache for invoicing and banking but I'd do it to say a few £thousand. My ltd company has been running 10 years now, people are saying I should close it down anyway to cut any liabilities and start a new one.
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