Gross Dividend Greater Than Net Profit Allowed ?

[scrollock]

Just doing my year end accounts, figures look like this.

Gross profit:£53,206
Net Profit:£42,565

Gross Dividend:£44,407
Net Dividend:£39,967

So my gross dividend is greater than my net profit (1st year of trading so no reserves to call on), yet the net dividend is covered.

is this allowed or will it be deemed a an illegal dividend ?

[ASB]

Looks ok to me. Dependant upon any other liabilities etc.

[malvolio]

Just doing my year end accounts, figures look like this.

Gross profit:£53,206
Net Profit:£42,565

Gross Dividend:£44,407
Net Dividend:£39,967

So my gross dividend is greater than my net profit (1st year of trading so no reserves to call on), yet the net dividend is covered.

is this allowed or will it be deemed a an illegal dividend ?

Company Management #101 - Gross dividends are paid out of net profits.

I think that you need to brush up on Director's Loan rules or get an accountant; preferably both. And why no reserves? Aren't you planning on paying corporation tax (I assume yes, since you've worked out net profits) or having any bench time? Also, depending on salary taken, you may be into higher rate tax which may mean a demand for advance payment for next year, which is personal money...

[Jeremiah@RHJAccountants]

Dividends are taken from post tax profits.

So based on your figures

Net Profit £42,565
Corporation tax due £8,513 (£42,565 x 20%)
Post tax profits/ reserves £34,052.

It seems you have taken more than this which would make the excess a director's loan which has tax implications if you directors loan account is overdrawn.

I would consider engaging an accountant if you do not have one or speak to your accountant as they will be best placed to advise you.

Have a read of these links form HMRC:

http://www.hmrc.gov.uk/factsheet/limited-company.pdf

HM Revenue & Customs: Directors' loan accounts and Corporation Tax explained

HM Revenue & Customs: Tax on UK dividends

Hope this helps

Jeremiah

[scrollock]

Dividends are taken from post tax profits.

So based on your figures

Net Profit £42,565
Corporation tax due £8,513 (£42,565 x 20%)
Post tax profits/ reserves £34,052.

It seems you have taken more than this which would make the excess a director's loan which has tax implications if you directors loan account is overdrawn.

I would consider engaging an accountant if you do not have one or speak to your accountant as they will be best placed to advise you.

Have a read of these links form HMRC:

http://www.hmrc.gov.uk/factsheet/limited-company.pdf

HM Revenue & Customs: Directors' loan accounts and Corporation Tax explained

HM Revenue & Customs: Tax on UK dividends

Hope this helps

Jeremiah

My net profit is after corporation tax, hence my reserves once all liabilities have been taken care is £42,565

[scrollock]

Company Management #101 - Gross dividends are paid out of net profits.

I think that you need to brush up on Director's Loan rules or get an accountant; preferably both. And why no reserves? Aren't you planning on paying corporation tax (I assume yes, since you've worked out net profits) or having any bench time? Also, depending on salary taken, you may be into higher rate tax which may mean a demand for advance payment for next year, which is personal money...

re. Management rule 101, this is what is confusing me.

lets simply this a bit

Gross profit £25K

Less corporation tax, net profit £20k

I declare a gross dividend of £20k

Dividend payable £18k

Whats happens to the 10% ? Does this need paying to HMRC, hence I am being double taxed ?

I havn't drawn any monies on the directors loan account, or paid any dividends, only taken the optimal minimal salary so far, just trying to optimise my dividend without making an illegal dividend.

[eek]

re. Management rule 101, this is what is confusing me.

lets simply this a bit

Gross profit £25K

Less corporation tax, net profit £20k

I declare a gross dividend of £20k

Dividend payable £18k

Whats happens to the 10% ? Does this need paying to HMRC, hence I am being double taxed ?

I havn't drawn any monies on the directors loan account, or paid any dividends, only taken the optimal minimal salary so far, just trying to optimise my dividend without making an illegal dividend.

Well your first problem is that gross profit is not what you think it is.

Gross profit is profit from sales after accounting for cost of sales (i.e. it is the difference between revenue and the cost of making a product or providing a service).

Net profit is profit after all other expenses are taken into account.

Corporation tax is paid on net profit which in your case is £53206.

You can pay a dividend of anything up to the total of all net profits after tax which is £42565.

Dividend tax credits are entirely separate to the above as the tax credit relates to personal tax rather than company tax. 2 seconds on google gives you this from HMRC

Companies pay you dividends out of profits on which they have already paid - or are due to pay - tax. The tax credit takes account of this and is available to the shareholder to offset against any Income Tax that may be due on their dividend income.
When adding up your overall taxable income you need to include the sum of the dividend(s) received and the tax credit(s). This income is called your dividend income.

so in your case you are fine. However what you have done

1) got basic terms totally wrong
2) not grasped the difference between corporate and personal
3) done things in what appears to have been a tax inefficient way.
4) Demonstrated that if you have an accountant you need to reread the basics guidebook they sent you (or they didn't send you one). Nixon Williams do a decent one from memory....


If you haven't actually got an accountant point 3 emphasises that you do probably need one.

[Jeremiah@RHJAccountants]

My net profit is after corporation tax, hence my reserves once all liabilities have been taken care is £42,565

This is known as profit after tax not net profit as you stated in your first post hence the advice given.

The profit after tax or reserves is what you can pay net dividends out of.

So as mentioned by others you have got basic terms wrong and really probably need an accountant or speak to the one you have as they are best placed to advise you.

You will be able to explain to them you circumstance in full as there is only so much you can say on a public forum.

[scrollock]

Well your first problem is that gross profit is not what you think it is.

Gross profit is profit from sales after accounting for cost of sales (i.e. it is the difference between revenue and the cost of making a product or providing a service).

Net profit is profit after all other expenses are taken into account.

Corporation tax is paid on net profit which in your case is £53206.

You can pay a dividend of anything up to the total of all net profits after tax which is £42565.

Dividend tax credits are entirely separate to the above as the tax credit relates to personal tax rather than company tax. 2 seconds on google gives you this from HMRC



so in your case you are fine. However what you have done

1) got basic terms totally wrong
2) not grasped the difference between corporate and personal
3) done things in what appears to have been a tax inefficient way.
4) Demonstrated that if you have an accountant you need to reread the basics guidebook they sent you (or they didn't send you one). Nixon Williams do a decent one from memory....


If you haven't actually got an accountant point 3 emphasises that you do probably need one.

Thanks Eek, I work in an industry where the terms gross profit and net profit have different meanings, although I have known this for the 20 years in working in it that they differ from the standard definition.

It's my first year of contracting and they don't apply to me, only my clients, so my bad for getting it wrong.

I get the difference now between the corporate and personal, thanks!

I do have an accountant, but I'm in a rush to try and get the money out of my company so I can complete on a house.

In what way have I have done things in a tax efficient way ? I've taken the optimal salary according to my accountant, the divi will be split over two people. I'm leaving a tiny amount in the company, but this is money that is earmarked for other purposes.

[eek]

Thanks Eek, I work in an industry where the terms gross profit and net profit have different meanings, although I have known this for the 20 years in working in it that they differ from the standard definition.

It's my first year of contracting and they don't apply to me, only my clients, so my bad for getting it wrong.

I get the difference now between the corporate and personal, thanks!

I do have an accountant, but I'm in a rush to try and get the money out of my company so I can complete on a house.

In what way have I have done things in a tax efficient way ? I've taken the optimal salary according to my accountant, the divi will be split over two people. I'm leaving a tiny amount in the company, but this is money that is earmarked for other purposes.

The unknown highlighted bit was why I thought it might have been inefficient. I assume (and hope) the other person is your spouse?