Dividends are a distribution from after tax profit and can be paid to shareholders based on their shareholdings. They are often a more tax efficient way of taking money from your company. BUT it is absolutely essential that you have made enough profit to avoid extra company tax, income tax and national insurance. Money in the bank doesn’t always equate to the amount you can take as dividend. You should also be aware that dividend tax rates have been increased, and they are set to increase further in 2018/19 .
You must know your available distributable profits. If you don’t have final accounts prepared you will need to estimate your post tax profits. This means using your bookkeeping records or management accounts and estimating the tax due on those profits. Only then do you know for sure that you can take a dividend.
Only take dividends within your distributable profit figure and you will avoid tax which is due on any overpaid amount. The over payment is treated, for legal purposes, as a loan from the company and if this loan is not repaid within 9 months of the end of the company’s financial year additional corporation tax is due.
You will also avoid paying any additional income tax and national insurance on the balance of the loan, because it is an interest free loan, and therefore an employee benefit.
To protect yourself from HMRC demands to treat your dividend as a salary, do the paperwork! A board minute declaring a dividend will state that the directors intended the payment/s to be a distribution of profit and not a salary.
Firstly, don’t panic! Put the disciplines in place that we have mentioned above and look to recover the situation.
If you cannot repay the overpayment immediately, you have 9 months to do so before the extra company tax is due.
Work with your accountant to monitor the situation so you are aware of your tax liabilities and don’t breach any more rules, such as the submission of a P11D declaring the interest free loan taken.
And, don’t think loans from your company are necessarily a bad thing. They can be useful if used correctly, but there are rules around this that need to be attended to.
For more information you can see HMRC’s guide on running a limited company, and more specifically how to take money out of a limited company .
Our services are broad and bespoke to you, if you need help declaring dividends or finalising your Accounts then get in touch. We’re happy to discuss the needs of your Limited Company and find a package that works for you and your budget.
All details above were correct at the time of publishing - for more up to date information please get in touch .
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