Splitting Dividends across Tax Years

[TomK]

Hi,

After my first year of contracting I had an e-mail from my accountants with my personal tax return ready for submission, which had been completed based on company accounts that I submitted to them.

One thing I noticed was that they had split dividends from the company year (June - June) across separate tax years, regardless of which tax year the dividend was actually taken in. I questioned this as I assumed that the tax year for the dividend should be based on the date the dividend was paid. They claimed it was a legitimate practise and would be tax advantageous.

This is a relatively large accountancy who specialise in contractors. Should I be concerned? Is this a legitimate practise?

Thanks,
TK

[TomK]

Might have answered my own question, a bit of Googling suggests it may boil down to the difference between interim dividends and final dividends.

Keen to hear other peoples' thoughts though.

[LondonManc]

NLUK won't reply because you've already asked your accountant. Sorry.

[ladymuck]

If YourCo's financial year does not match the Tax Year, then when you take dividends does matter as the date determines the Tax Year they will be treated in.

[VectraMan]

They'll be converting some of the dividends into a director's loan that's then paid back from dividends in the next tax year. Not strictly speaking right perhaps, but that gets around the date that it's paid problem.

Of course it only really works if you earn a lot in Year 1, and not a lot in Year 2.

[pr1]

I think they'll be fudging it to minimise tax owed, and they'll say you "declared" the dividends in the previous tax year but didn't distribute them until afterwards

Lots of accountants do this, it's part of their job to help you be tax efficient

[EinsteinTax]

Hi,

After my first year of contracting I had an e-mail from my accountants with my personal tax return ready for submission, which had been completed based on company accounts that I submitted to them.

One thing I noticed was that they had split dividends from the company year (June - June) across separate tax years, regardless of which tax year the dividend was actually taken in. I questioned this as I assumed that the tax year for the dividend should be based on the date the dividend was paid. They claimed it was a legitimate practise and would be tax advantageous.

This is a relatively large accountancy who specialise in contractors. Should I be concerned? Is this a legitimate practise?

Thanks,
TK

Strictly speaking, if the dividend payments were declared and paid your accountant should not be retrospectively changing this to minimise your tax liability. However, it is not uncommon for accountants to treat all payment made from your business account to your personal account as a kind of "slush fund" and then at year end allocate the payments as either dividend payments or director loans to minimise your tax liabilities.

It's always best to agree your dividend strategy in advance with your accountant. This way you know exactly how each payment will be allocated (dividend or loan) when it is made and you have the best chance of operating as tax efficiently as possible without the need for retrospective classification.

[EinsteinTax]

I think they'll be fudging it to minimise tax owed, and they'll say you "declared" the dividends in the previous tax year but didn't distribute them until afterwards

Lots of accountants do this, it's part of their job to help you be tax efficient

It is the date on which the dividend is paid that determines the tax point, not when it is declared. If a dividend is declared on 1st April 2016, but not paid until 10th April 2016, it will be treated as 16/17 income.

[pr1]

It is the date on which the dividend is paid that determines the tax point, not when it is declared. If a dividend is declared on 1st April 2016, but not paid until 10th April 2016, it will be treated as 16/17 income.

Interesting! That's not what I'd interpreted (second hand, to be fair) from a friend... so if you can do it with carefully declared directors loans what happens to the tax for the previous year (presumably directors loans aren't taxable?)

[EinsteinTax]

Interesting! That's not what I'd interpreted (second hand, to be fair) from a friend... so if you can do it with carefully declared directors loans what happens to the tax for the previous year (presumably directors loans aren't taxable?)

Director Loans need to be handled with care as they can attract additional tax charges if they exceed £10k or are not repaid before 9 months after year end.

It's probably easiest to illustrate with an example. Let's assume you have taken salary and dividends that have used you basic rate tax band (circa £43k for 16/17). It's the end of March 2017 and you have a £5k personal credit card bill to pay.

If you take £5k as dividends this will push you into the next tax band and you will need to pay 32.5% higher rate dividend tax (£1,625).

However, instead of taking £5k dividends at the end of March you could take a £5k director loan. On the 6th April 2017 you would have a fresh basic rate dividend allowance, so you could take a £5k dividend and use that to repay your £5k director loan. This would avoid the £1,625 higher rate dividend tax.

This can only be used for short term cash flow issues, but can be a useful option if you are short on personal funds towards the end of the tax year.