tax on dividends?

[sofia]

hoping someone can help - started a limited company in June 2007, turning over £59,563 in the year to 30th June 2008. My expenses were £11,903 and tax paid on £47,683 was £9,852, and the dividend came in at £35,000. From 1st July 2008 until 30th June 2009 turn over was £83,079, expenses £13,524, tax paid on £69,555 was £14,738, with dividend paid at £42,000. Also paid corporation tax on both years. I earnt around £7000 in July 2009 before taking a permanant job, paying PAYE, from August 3rd 2009 and have been paying emergency tax on my salary since that time, as i was advised by accountant to keep company the open. I submitted my papers to the accountant a couple of weeks ago expecting to pay around £1000 in tax for 2009/10 that represented the one month before i took the salaried job. However, the accountant has told me that my tax bill will be £10,000! The explanation is that i have to pay tax on dividends? surely i have paid this? if anyone can help me make sense of this i would be very grateful -

[xoggoth]

Tax is paid on profit and dividends are paid out of the remainder, so they don't give rise to any more corporation tax. As corporation tax has already been paid, dividends received are also not subject to income tax to any recipient who is a standard rate tax payer.

However, if you are a higher rate tax payer you do pay additional tax in respect of dividends that takes you over the threshold and that is presumably what your accountant is referring to. If the divis quoted were your only income there shouldn't be any extra tax but would I be right in assuming those expenses included salary?

PS Actually, can't figure how it can comes out to as much as 10k even if those "expenses" were all salary. Assuming standard allowance, off top of head, you need to earn about £43k pa, both salary and divi, to be in higher rate. Why not ask accountant for breakdown?

PPS The timing of the divis can also make a difference, it's what's paid in any personal tax year that matters.

[DaveB]

Tax is paid on profit and dividends are paid out of the remainder, so they don't give rise to any more corporation tax. As corporation tax has already been paid, dividends received are also not subject to income tax to any recipient who is a standard rate tax payer.

However, if you are a higher rate tax payer you do pay additional tax in respect of dividends that takes you over the threshold and that is presumably what your accountant is referring to. If the divis quoted were your only income there shouldn't be any extra tax but would I be right in assuming those expenses included salary?

PS Actually, can't figure how it can comes out to as much as 10k even if those "expenses" were all salary. Assuming standard allowance, off top of head, you need to earn about £43k pa, both salary and divi, to be in higher rate. Why not ask accountant for breakdown?

PPS The timing of the divis can also make a difference, it's what's paid in any personal tax year that matters.

You also needed to have completed the appropriate dividend vouchers showing that CT has been paid on the money received. If you havnt done so or not supplied them to your accountant then he may be assuming that tax has not been paid.

[sofia]

You also needed to have completed the appropriate dividend vouchers showing that CT has been paid on the money received. If you havnt done so or not supplied them to your accountant then he may be assuming that tax has not been paid.

Thank you both for replying - i am going a little crazy here! the "Directors salaries" for year ending 06/08 was £5,200 and for 06/09 £5,400 that were included in the expenses. Have no idea about the CT voucher, can this be done retrospectively? obviously you are picking up that i know nothing! I just paid a lot of money to the accountant to ensure accounts/tax liabilites were in order, and signed anything put in front of me. the accountant did everything, and still has all paperwork. I can't understand if i have to pay tax on dividends this year why i didn't have to pay them last year? although the turnover was approx 24k more that cannot equate to a 10k tax liability on top of what i have already paid? when i spoke to the accountant i was told that it was because of the way the year fell, but still don't get how it would come to 10k especially as i was paying emergency tax on my earnings of 50K from 3rd august 2009 until present time. Prevailing upon your good nature i know, but want to have as much info as i can when i meet with accountant next week.

[DaveB]

hoping someone can help - started a limited company in June 2007, turning over £59,563 in the year to 30th June 2008. My expenses were £11,903 and tax paid on £47,683 was £9,852, and the dividend came in at £35,000. From 1st July 2008 until 30th June 2009 turn over was £83,079, expenses £13,524, tax paid on £69,555 was £14,738, with dividend paid at £42,000. Also paid corporation tax on both years. I earnt around £7000 in July 2009 before taking a permanant job, paying PAYE, from August 3rd 2009 and have been paying emergency tax on my salary since that time, as i was advised by accountant to keep company the open. I submitted my papers to the accountant a couple of weeks ago expecting to pay around £1000 in tax for 2009/10 that represented the one month before i took the salaried job. However, the accountant has told me that my tax bill will be £10,000! The explanation is that i have to pay tax on dividends? surely i have paid this? if anyone can help me make sense of this i would be very grateful -

Thank you both for replying - i am going a little crazy here! the "Directors salaries" for year ending 06/08 was £5,200 and for 06/09 £5,400 that were included in the expenses. Have no idea about the CT voucher, can this be done retrospectively? obviously you are picking up that i know nothing! I just paid a lot of money to the accountant to ensure accounts/tax liabilites were in order, and signed anything put in front of me. the accountant did everything, and still has all paperwork. I can't understand if i have to pay tax on dividends this year why i didn't have to pay them last year? although the turnover was approx 24k more that cannot equate to a 10k tax liability on top of what i have already paid? when i spoke to the accountant i was told that it was because of the way the year fell, but still don't get how it would come to 10k especially as i was paying emergency tax on my earnings of 50K from 3rd august 2009 until present time. Prevailing upon your good nature i know, but want to have as much info as i can when i meet with accountant next week.

It's also complicated by the fact that your first company tax year was not a full trading year. The tax year runs from April to April so your first years tax would have been based on the period June 07 to April 08. Salaries and other costs are paid out of income before tax, dividends can only be paid out of profits after tax.

You don't say how you paid your £42,000 dividend. What it in one lump sum or were dividends paid monthly? If it was a lump sum at the end of the year it may have fallen in the same tax year as your permie salary and put you over the earnings limit for lower rate tax. If this is the case then you would then be liable for tax at 25% on those dividends, which would come to around £10,000 if I read what you say correctly.

What should happen is this.

A = Total income for the tax year.
B = Operating costs for the tax year (including VAT, Salaries, Employers NI, Expenses repaid to employees etc)
C = Profits BEFORE tax
D = Profits AFTER tax.
E = Corporation tax rate (at 21%)
F = Corporation Tax due.

What should happen is ( and IANAA and this is simplified )

C = A-B (Profit before tax = Income - costs )
F = C*E (Corporation Tax Due = Profit before tax X Corporation Tax Rate)
D = C-E (Profit after tax = Profit before tax - Corporation Tax due)

Profit after Tax can then be distributed to shareholders as dividends. As tax has already been paid on this money in the form or Corporation tax, no further tax is due if the shareholder is a basic rate tax payer. If the shareholder is an upper rate tax payer additional tax at 25% is due on any dividends paid over the tax limit. When distributing dividends the company must issue dividend vouchers showing how much dividend was paid and how much of it was a tax credit against tax already paid by the company. If these vouchers are not issued HMRC may declare the dividend as untaxed income and slap you with a bill for income tax on that amount.

Dividend taxation is explained here : Tax on Dividends

[xoggoth]

A gov.uk site with security certificate problem. Ho hum.

If the accountant did everything including the timing of the dividends in the way Daveb says, sounds like he must be a complete idiot. They often are, I paid a lot of unecessary penalties and interest in my first two years contracting because I left it all to the accountant.