Dividend Frequency
Discussion
Anyone know what HMRC accepts as dividend payments in terms of frequency?
O/H has started a company & will be paying herself a director salary of £700 a month to avoid paying NI & income Tax while her & her business partner try to build their customer base etc. Would 4 a year be acceptable? They're a 2 (wo)man band at the moment but may take on 1-2 staff next year...
O/H has started a company & will be paying herself a director salary of £700 a month to avoid paying NI & income Tax while her & her business partner try to build their customer base etc. Would 4 a year be acceptable? They're a 2 (wo)man band at the moment but may take on 1-2 staff next year...
Thanks, puts my mind at ease. And yep, understand RE profit etc. Was only the frequency I was questioning. IE they’d pay out 3 interim dividends throughout the year with a final dividend once profits declared & corp tax paid. Assuming monthly dividends would attract the tax man as it could be interpreted as a salary - especially as its unlikely to vary month on month.
kentlad said:
Thanks, puts my mind at ease. And yep, understand RE profit etc. Was only the frequency I was questioning. IE they’d pay out 3 interim dividends throughout the year with a final dividend once profits declared & corp tax paid. Assuming monthly dividends would attract the tax man as it could be interpreted as a salary - especially as its unlikely to vary month on month.
Yep, better safe than sorry.There are no regulations about how frequently dividends can be paid. However, there are quite a few considerations that need to be taken into account.
A dividend is a distribution of profits. If there are no profits in the company, no dividends can be paid.
Profits can be paid from historic reserves (i.e. accumulated profits).
If a payment is made to a shareholder who is also a director, it must be clear that the payment is indeed a dividend and not salary. HMRC can challenge payments to directors if they think that the payment was really a salary payment rather than a distribution of profit.
Dividends should have "Dividend Certificates" issued to support them along with minutes of directors' meetings authorising the dividend.
A dividend is a distribution of profits. If there are no profits in the company, no dividends can be paid.
Profits can be paid from historic reserves (i.e. accumulated profits).
If a payment is made to a shareholder who is also a director, it must be clear that the payment is indeed a dividend and not salary. HMRC can challenge payments to directors if they think that the payment was really a salary payment rather than a distribution of profit.
Dividends should have "Dividend Certificates" issued to support them along with minutes of directors' meetings authorising the dividend.
Thanks Eric, appreciate the detailed response. Will bear that all in mind come dividend time. The business is time for services (nursery) rather than goods or services & looking like they should be in profit in the next month or so as only real overhead is rent. Will plan for the first interim dividend around June time once we’ve got a H1 profit figure. Thanks all.
Don't forget to budget for the Corporation Tax liability on the net profit. For example, if the net taxable profit is £100,000, approximately £20,000 of that will need to be set aside for the Corporation Tax arising. That will leave you with £80,000 profit which could be distributed as dividends (in theory).
Not sure if this is “best practice” or not but using Eric’s example when we have a “Directors meeting” we make sure the minutes say Profit forecasted to be £100k therefore agreed to declare an interim div of £80k and move £20k to bank account for corp tax.
Just adds to any evidence that it’s a dividend and not salary should it be required.
Just adds to any evidence that it’s a dividend and not salary should it be required.
Similar to above, I take dividends from my company whenever I need them, usually once a month. On my bank account tracker I specifically highlight tham as 'Dividend' to differentiate from the 'PAYE' payments I take as instructed by my accountant each month.
The only actual reason I do this is so I , and more importantly my accountant, can easily identify whether the transaction out of my company account should be considered as dividend or something else. The tax man cares not how often or how much dividend you take on a regular basis so long as course as you have the money in the company profit to do it.
To this end each time an invoice is paid into my business current account I put 30% of the value (excl. VAT) into a reserve account, This means I always have enough in the reserve to cover corp & personal taxes (well it's been ok fo the last 10 years anyways), and what is left in my current business account is pretty much 'mine' and can be used to either PAYE myself or take divindends from as required.
The only actual reason I do this is so I , and more importantly my accountant, can easily identify whether the transaction out of my company account should be considered as dividend or something else. The tax man cares not how often or how much dividend you take on a regular basis so long as course as you have the money in the company profit to do it.
To this end each time an invoice is paid into my business current account I put 30% of the value (excl. VAT) into a reserve account, This means I always have enough in the reserve to cover corp & personal taxes (well it's been ok fo the last 10 years anyways), and what is left in my current business account is pretty much 'mine' and can be used to either PAYE myself or take divindends from as required.
In theory, the taxman can care very much whether a payment is a dividend or salary as they lose out a a huge amount in respect of National Insurance contributions with dividends. I have attended lectures where dire consequences have been threatened for businesses that are sloppy with their "dividend" payments in that HMRC could reclassify them as salary and ask for the missing tax and NI.
In reality, I have never seen HMRC do this.
In reality, I have never seen HMRC do this.
I would question why you are using a company rather than LLP.
You have to pay the corporation tax on profits that your dividend is paid from. So 20% paid.
You then pay tax on the dividend income as personal taxation (you have used up you tax free allowance in the salary). So although you are below the 40% tax class you will be paying over 40% total if in the 25% band when you add the corporation tax.
You have to pay the corporation tax on profits that your dividend is paid from. So 20% paid.
You then pay tax on the dividend income as personal taxation (you have used up you tax free allowance in the salary). So although you are below the 40% tax class you will be paying over 40% total if in the 25% band when you add the corporation tax.
Storer said:
I would question why you are using a company rather than LLP.
You have to pay the corporation tax on profits that your dividend is paid from. So 20% paid.
You then pay tax on the dividend income as personal taxation (you have used up you tax free allowance in the salary). So although you are below the 40% tax class you will be paying over 40% total if in the 25% band when you add the corporation tax.
Ltd co only really works if you want to leave money in the business as it attracts the lowest tax liability, at least until you want to take money out!You have to pay the corporation tax on profits that your dividend is paid from. So 20% paid.
You then pay tax on the dividend income as personal taxation (you have used up you tax free allowance in the salary). So although you are below the 40% tax class you will be paying over 40% total if in the 25% band when you add the corporation tax.
Storer said:
I would question why you are using a company rather than LLP.
You have to pay the corporation tax on profits that your dividend is paid from. So 20% paid.
You then pay tax on the dividend income as personal taxation (you have used up you tax free allowance in the salary). So although you are below the 40% tax class you will be paying over 40% total if in the 25% band when you add the corporation tax.
They’ll be taking minimum salary payments so well below higher tax band, the first year they’ll likely be within the tax free personal allowance. So in reality they’ll pay 20% corp tax & then 7.5% on dividends, so just about more efficient than just taking a higher salary. The plan for the business is to eventually open multiple nurseries but this is at least a few years away. But part of the reason we set them up as a LTD co is that her business partner is a good 30 years older & will be retiring in a few years, so the LLP would have had to be folded when she retires unless she found a new partner. You have to pay the corporation tax on profits that your dividend is paid from. So 20% paid.
You then pay tax on the dividend income as personal taxation (you have used up you tax free allowance in the salary). So although you are below the 40% tax class you will be paying over 40% total if in the 25% band when you add the corporation tax.
Eric - thanks for the advice, I’m actually a Finance Controller for a media company so aware of corp taxes etc - but we have a group function that deals with Stats & Dividends which is why I was asking - our group only issue one dividend a year post results & the group accountant was less than conclusive when I asked them about it.
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