Dividends..how much and implications?

[andrew_xlb]

Hi All,

I have been contracting for a little while now and have got an accountant to deal with my limited company's dealings..he has obviously advised me on roughly what dividends to release and the best way to do this..

I just wondered what general experience was of how much you can release over a month - without incurring penalties..? I am not at all tax-savvy, so please go easy on me!!

I just wondered what the implications would be if I were to release a big lump sum one month..?

Thanks in advance..

[Gonzo]

Erm, one thing could be that you would spend all day logged on to your internet banking looking at your bank balance and chuckling away to yourself.

hth

[ASB]

You can pay dividends as often or as infrequently as you wish. The only real stipulation is that there must be sufficent retained profit to merit the dividend. Paying from current year profits is risky because the trading position could worsen during they year causing those to evaporate that would then make it illegal.

I think getting you accountant to explain the basic principles in a little more detail may be beneficial.

[mossman]

Dividends

I am not an accountant. You should always check with your accountant on these matters. Anyone else can feel free to correct me, but here's my understanding based on 10 years contracting.

1 You can pay a dividend whenever you like. You might want to avoid paying one every month because it looks a bit like a salary. You have to complete some documentation relating to the dividend - your accountant should be able to provide a template for you.

2 If you are the sole shareholder, the whole of the net dividend will come to you.

3 The company must have made that much profit for you to pay it out as a dividend. Don't anticipate profit, in case it doesn't happen. Profit is takings minus outgoings (outgoings includes everything that the company pays out, including your salary, but not dividends). Don't forget that some of the money in the co. bank account will be VAT that is not yours but payable to HMRC at the end of the quarter. You will want to leave enough in your co. account to cover cheques not yet cashed, your accountant's standing order (if applicable) and probably next month's salary and expenses. Also anything that has been set up to go from the account but hasn't come out yet e.g. last month's VAT payment to HMRC.

4 If you want to avoid paying higher rate tax, you will want to make sure your total personal income for the tax year does not exceed the limit for standard rate tax, which for 2009/10 is £41,075. This means that your gross salary plus gross dividend plus any other income e.g. property rental income, bank interest, income from a permie job in the same tax year must be within that limit.

So if you are paying yourself a salary of £11,075, and you have absolutely no other income in the tax year, then you can pay yourself total dividends of £30,000 in the tax year without paying higher rate tax. That's a gross dividend. I believe you still have to allow a notional 10% tax, so that what you can pay yourself is actually £27,000 net. (someone please correct me if I am wrong).

5 Don't forget corporation tax (currently 21% on profits up to £300,000 I believe). So if you had made £10,000 profit, your CT liability at the end of the year would be £2,100, so the amount available as a net dividend is £7,900.

Hope that helps.

[shoes]

Why that particular salary figure?

Isn't something around the 6k mark more tax efficient?

[helen7]

Why that particular salary figure?

Isn't something around the 6k mark more tax efficient?

yes that is fine if you want to point a big arrow at yourself asking for an ir35 investigation.

[Platypus]

yes that is fine if you want to point a big arrow at yourself asking for an ir35 investigation.

It's my understanding that there's no evidence that this is the case.

Anyone know differently?

[mossman]

Salary

The salary figure I gave was just an example, not a suggestion. My accountant has me paying myself about the minimum wage, but I wouldn't know the implications of not doing this. Perhaps, as someone suggested, it might bring unwanted attention.

[zamzummim]

My accountant suggested no salary, just divs, anyone else is just paying themselves divs?

[Pickle2]

yes that is fine if you want to point a big arrow at yourself asking for an ir35 investigation.

Doesnt paying NMW make you stand out even more as someone who is worried about an IR35 investigation (and therefore the exact sort of business Hector should be looking at)? Every real small business goes down the low salary and divis route, so by doing anything different you are flagging yourself up for an investigation.