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salary + dividends and negative reserves

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    salary + dividends and negative reserves

    Hi all, I need some advice on how best to deal with salary+dividends before April 6th. My situation is as follows: I recently started my Ltd having not previously worked this tax year. I have not yet paid out any salary or dividends. I now have profit of around 13k. I expect to earn over higher rate threshold next tax year.

    Can I pay myself the 13 k profit as a dividend (after CT), then after this, declare a salary payment of £10600 as payment to directors loan account (despite no longer having the available funds)?

    This would incur more immediate tax than just paying 10k salary + 3k dividends but would have the benefit of effectively shifting some of next years income into this year.

    My accountant says this is not allowed as it would 'create negative reserves'. However, I have come here to consult the hive mind for a second opinion as I can't find any info on the web for this situation and don't have 100% faith in their answer.

    #2
    So you know more than your accountant, on the back of zero experience then...?

    Dividends are paid out of profits. Profits are income after all liabilities have been cleared - little things like PAYE, Employers and Employees NICs and Corporation Tax. Taking money out without allowing for those liabilities means you are deliberately trading while insolvent - i.e. you don't have the money in YourCo to cover your legal debts at your year end - which is itself illegal.

    You can have some of the money, as dividends if you prefer although it makes little real difference if you have any personal tax allowances left for the year. Ask your accountant - and listen to what they say.
    Blog? What blog...?

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      #3
      Legalities aside you've got to think of your warchest as well. Yes it could be said its the same money but just in your personal account but I did bet my last dollar you won't be disciplined enough to not spend it. You need at the very least 3 months of spare money behind you before you finish the gig.
      'CUK forum personality of 2011 - Winner - Yes really!!!!

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        #4
        the problem you have is no money in the company. If you had money you could extract more (i.e. what you owe to HMRC for example) than you should, and once you get more money in to clear the debt then you're fine. If you don't get more money in then you have to change the dividend to a loan (cos you can't have a dividend made of someone else's money).

        But as you just don't have the cash it's academic. Take the £13k in whatever way you feel, but you can't take what you haven't got.

        PS. A director loan is a director loan and not a dividend, therefore it makes no odds, but does attract unwanted attention.
        See You Next Tuesday

        Comment


          #5
          Originally posted by malvolio View Post
          So you know more than your accountant, on the back of zero experience then...?

          Dividends are paid out of profits. Profits are income after all liabilities have been cleared - little things like PAYE, Employers and Employees NICs and Corporation Tax. Taking money out without allowing for those liabilities means you are deliberately trading while insolvent - i.e. you don't have the money in YourCo to cover your legal debts at your year end - which is itself illegal.

          You can have some of the money, as dividends if you prefer although it makes little real difference if you have any personal tax allowances left for the year. Ask your accountant - and listen to what they say.
          Heh - I certainly don't know more than my accountant but someone on here might! It can pay to be inquisitive and question things.. at the very least I'll come away with a better understanding.

          Thanks for the reply - I understand better now. I take it then that even though the salary would not have been paid yet at the point the dividend is declared, it is still considered a liability retrospectively somehow?

          Comment


            #6
            Originally posted by Lance View Post
            the problem you have is no money in the company. If you had money you could extract more (i.e. what you owe to HMRC for example) than you should, and once you get more money in to clear the debt then you're fine. If you don't get more money in then you have to change the dividend to a loan (cos you can't have a dividend made of someone else's money).

            But as you just don't have the cash it's academic. Take the £13k in whatever way you feel, but you can't take what you haven't got.

            PS. A director loan is a director loan and not a dividend, therefore it makes no odds, but does attract unwanted attention.
            +1

            I made a minor cockup in the first year I was limited company as I was too busy clearing a personal loan off. I'd overpaid dividends when it came to corporation tax time and fronted up to them; I had money due to come in so knew I could clear it within two months. The best advice that I can give is that you must, must, must ring them. Explain that you've made a mistake, hit a cashflow issue and ask if you can pay your CT or whatever it is you owe by instalments as quickly as you reasonably can.
            The greatest trick the devil ever pulled was convincing the world that he didn't exist

            Comment


              #7
              Originally posted by Rafd View Post
              Heh - I certainly don't know more than my accountant but someone on here might! It can pay to be inquisitive and question things.. at the very least I'll come away with a better understanding.
              It does but you're first action should have been to ask your accountant why they came to that conclusion. They should explain it to a level of detail that leaves you in little doubt. If they don't keep asking them until you do. That's the way you learn, not by second guessing them with some guys on the net.
              'CUK forum personality of 2011 - Winner - Yes really!!!!

              Comment


                #8
                Originally posted by Lance View Post
                the problem you have is no money in the company. If you had money you could extract more (i.e. what you owe to HMRC for example) than you should, and once you get more money in to clear the debt then you're fine. If you don't get more money in then you have to change the dividend to a loan (cos you can't have a dividend made of someone else's money).

                But as you just don't have the cash it's academic. Take the £13k in whatever way you feel, but you can't take what you haven't got.

                PS. A director loan is a director loan and not a dividend, therefore it makes no odds, but does attract unwanted attention.
                In the proposed plan I would set aside enough to cover tax liabilities so that should be ok. I was led to believe that it is valid to declare a salary payment despite having no funds to cover it. It is treated as a credit to the directors loan account - in other words I am loaning money to the company until the salary is actually paid. I found this info here:

                Can a Director's Salary be allowed to create a loss and negative Net Assets? | AccountingWEB

                Comment


                  #9
                  What happens if you get canned before May 16? You shouldn't be buggering about like this in your first year of contracting.
                  'CUK forum personality of 2011 - Winner - Yes really!!!!

                  Comment


                    #10
                    Originally posted by northernladuk View Post
                    You shouldn't be buggering about
                    FTFY

                    In fact I'm amazed at the levels people seem to want to go to save a few quid sometimes, maybe I'm just not switched enough ho hum

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