Pre-pay Dividends to avoid next year's tax?

[nfoote]

Just a quick question about dividends and tax.

Currently I have been paying out my personal salary (as per the salary schedule my accountant created for me) and my dividends (roughly per FreeAgent's calculations) each month.
This generally occurs around the 4-6th of each month as that is when my invoices are generally paid.
As such my company has just finished today the last round of salary/dividend payments for the financial year ending on the 1st of April.

I've been looking through FreeAgent's Self Assessment calculation sheet and had a question....
Since I've only been trading since mid-Oct this year I've currently earned through dividends from my company £15,720.00
I've heard mention before and also FreeAgent's Self Assessment page makes reference to it, that there is a Extended Basic Rate Band of up to £18,622.40

Firstly, does this mean I can earn up to £18,622.40 from dividends before having to pay tax on them?
(Also once over that mark do you pay tax on all your dividends earnings or just the amount over the Extended Basic Rate Band?)

Assuming the above is true does that then mean I can personally receive a further £2902.40 in dividends this financial year without affecting my tax due?

Assuming that THAT is also true, is it then prudent for my company to issue another dividend to myself for that gap amount?
This will bring my personal dividend tax allowance right up to the line for the current financial year.
Because my company will effectively be pre-paying most of next month's dividend to myself then the dividend due to be paid out on the 4-6th of April (which I believe falls into the 11/12 tax year?) will be smaller, thus reducing my 11/12 total dividends received by April 2012, thus reducing my tax owed in the 11/12 financial year.
Is this all correct? It seems to make sense to me, pay right up to the top of the zero tax band this year, thus reducing income next year, thus reducing tax burden next year. Correct?

The one issue is that I have already paid out in dividends all of the retained profits for my company from the 10/11 tax year.
The bank account now only contains Company Tax owed, NI(Employer/Employee) owed and PAYE owed.
If I paid a further £2902.40 in dividends this would essentially be using the Company Tax "pot" which is simply sitting there until Jan 2012.
Is it ok and legal to do this? Obviously the first dividend issued for the 11/12 year would be £2902.40 LESS than normal, thus the Company Tax "pot" would be repaid in asap, ie April (I'm not stupid!).

It seems to all work out to me but I just wondered if from an accounting and legal point of view you can issue dividends however/whenever you like as long as you have the cash to cover your tax debts when they are eventually due?

[nfoote]

Ah, I just noticed I need to add the Cash Dividend's PLUS the Tax Credits that get generated to hit that £18,622.40

What is the max Cash Dividend's you can earn? (ie less the Tax Credits)
Somewhere around £16,800 by the look of it?

[Craig@Clarity]

The higher rate threshold in 10/11 is gross income totalling £43,875 (Personal allowance £6475 + Basic Rate Band £37,400). Assuming your personal income is simply salary and dividends, to work out what "gap" you have left before breaching the HR limit is working out what your gross income is first. This is gross salary + gross dividends.

The dividends you declare and pay from your company to yourself is a net dividend. To work out the gross, you simply divide the net by 0.9

When working out whether you hit the higher rate threshold, you can use the calculation:

Gross income from employment in the tax year X (J)
Gross income from dividend (net dividend / 0.9) X (K)
Other income e.g. rental profit, gross bank interest X (L)

Total gross income X (M) = (J) + (K) + (L)

Less Higher Rate Threshold (10/11) 43,875 (N)

Gross before HR tax X (O) = (N) – (M)


I'm not sure where the "Extended Basic Rate Band of up to £18,622.40" for you comes from as it sounds like it is unique to your situation. It may have something to do with perhaps any personal pension contributions you have made in the tax year.

Don't forget, its the dividend declaration and the date the dividends are declared that counts for tax purposes. Dividends are declared out of retained profits in the company rather than physical cash sat in the business account, so although you may only have CT money left in there, what does the profit say.

Your accountant should be able to perform basic tax planning to advise you on how much is left to declare as a dividend in the tax year and what the tax implications are.

[MrRobin]

There is no further personal tax to pay on dividends so long as your total earnings remains below the 40% rate limit, which is equal to your personal allowance (£6,475 for most) PLUS the upper limit of the 20% tax band (£37,400 for this tax year).

Your total earnings will be your salary, plus the GROSS dividend (net div / 0.9), plus anything else you have as income e.g. rental, savings interest etc etc. Plus anything you may have earned before you started in October, from April 6th 2010.

[VectraMan]

Just to add, yes it's a good idea to pay yourself right up to the upper limit in dividends, as you'll lose the years allowance forever if you don't.

Dipping into your tax money to pay a dividend is risky, but as long as you can ultimately cover your liabilities shouldn't be a problem in reality. If you're awaiting a payment due on April 7th it would be a shame to lose out on your allowance by waiting those extra couple of days. Of course if the money doesn't show up, you may then have a problem.

[nfoote]

Just to add, yes it's a good idea to pay yourself right up to the upper limit in dividends, as you'll lose the years allowance forever if you don't.

Dipping into your tax money to pay a dividend is risky, but as long as you can ultimately cover your liabilities shouldn't be a problem in reality. If you're awaiting a payment due on April 7th it would be a shame to lose out on your allowance by waiting those extra couple of days. Of course if the money doesn't show up, you may then have a problem.

Assuming I don't go run out and spend my money willy nilly could I not just "reinvest" in the company by sending the money back if that April 7th payment never materialises?

[Alan @ BroomeAffinity]

Dipping into your tax money to pay a dividend is risky, but as long as you can ultimately cover your liabilities shouldn't be a problem in reality. If you're awaiting a payment due on April 7th it would be a shame to lose out on your allowance by waiting those extra couple of days. Of course if the money doesn't show up, you may then have a problem.

For a distribution to be a dividend, the company muist have retained profits from which to pay it. The money you have set aside for VAT and CT is NOT retained profits. However, if you have an invoice due which has not been paid then this money due is profits and you can probably safele set the one against the other. But be careful and make sure you are keeping the correct dividend paperwork. You are keeping dividend paperwork?

[nfoote]

But be careful and make sure you are keeping the correct dividend paperwork. You are keeping dividend paperwork?

FreeAgent generates a Dividend Declaration whenever you classify a payment as a dividend. This sets out the dividend amount, tax credit and shareholders paid share. It stores this in your account on-line and I also download a pdf copy to keep on my local machine. Suffice?

[tyut4669]

Remember to have sufficient profits to be able to declare dividends.

[Sockpuppet]

Assuming I don't go run out and spend my money willy nilly could I not just "reinvest" in the company by sending the money back if that April 7th payment never materialises?

Yes just declare the dividend and mark it down as a directors loan (i.e. money that the company owes to you). If the money never comes then you've not lost the allowance and the company can hold on to that loan from you and work it off.

Best of both worlds.