Dividend Question

[IR35 Avoider]

So if the dividend is paid net, does that mean the company pays the tax just like with PAYE?

You need to get this the right way around. The company pays corporation tax on its profits. The company's tax bill is not in any way affected by whether there are any dividends or how big they are or when they are paid.

In your hands, dividends are treated as though they have already been taxed at 10%. (It is completely irrelevant what tax the company actually paid on profits.) Dividends are taxed at 10% for basic rate taxpayers and 32.5% for higher-rate payers. A basic rate payer is taxed at £1 on each £9 of dividend received, but is regarded as having already paid £1, so has no net tax to pay. A higher rate payer has to pay tax of £3.25 for each £9 received, is regarded as having already paid £1, therefore only has another £2.25 to pay.

Legal dividends can only be paid out of the after-tax money in the company.

If you cannot prove that you knew at the time you declared a dividend that you could afford if out of profits after corporation tax, HMRC may regard it as illegal and tax it as salary. Similarly, if you have not documented it properly with minutes of the meeting at which it was declared they may decide it was an illegal dividend and tax it as salary. If you only realise the need for minutes when you're inspected, and try to pass off back-dated minutes as having been produced at the time, that is a criminal offense for which people have been sent to jail in the past. Do not assume your "full service" accountant produces these minutes, apparently this mistaken assumption is the most common reason people get into trouble with this.

[VectraMan]

Similarly, if you have not documented it properly with minutes of the meeting at which it was declared they may decide it was an illegal dividend and tax it as salary. If you only realise the need for minutes when you're inspected, and try to pass off back-dated minutes as having been produced at the time, that is a criminal offense for which people have been sent to jail in the past. Do not assume your "full service" accountant produces these minutes, apparently this mistaken assumption is the most common reason people get into trouble with this.

This is always the bit that worries me. According to my accountant, as a small company all I need to do is have a meeting by myself, sign a declaration form and keep a copy (and send one to them for tax records), which is what I've done. I'm never quite sure what is meant by official minutes, and if a piece of paper saying "at the meeting at this date this happens" counts as official minutes, or whether something more formal needs to happen.

[ASB]

This is always the bit that worries me. According to my accountant, as a small company all I need to do is have a meeting by myself, sign a declaration form and keep a copy (and send one to them for tax records), which is what I've done. I'm never quite sure what is meant by official minutes, and if a piece of paper saying "at the meeting at this date this happens" counts as official minutes, or whether something more formal needs to happen.

This *might* help. http://www.accountancygroup.com/-ct=...5462&tlt=d.htm

[oraclesmith]

Regarding the dividend that is not the position since ACT was abolished.

There is no CT on dividends, only profits. Dividends are paid net and attract a tax credit of 1/9th (i.e. 10% of the nominal gross dividend).

But the original question was about keeping back a sum in the company accounts to cover any tax on dividends paid out, presumably in advance of the final accounts and main CT being calculated and paid. Although dividends are technically paid out of profits after tax, in practise they are usually paid out before the CT is sorted out. And of course the profits themselves attract CT.

Although ACT is abolished, surely that's just a matter of timing ? You still need to ensure you have the whole CT tax amount in hand when you pay CT (ie. in relation to the dividends paid out plus any retained profits).

[ASB]

Although ACT is abolished, surely that's just a matter of timing ? You still need to ensure you have the whole CT tax amount in hand when you pay CT (ie. in relation to the dividends paid out plus any retained profits).

Yes, it is mainly timing. Since the abolition of ACT one has to more careful to ensure the CT is to hand when it is due, since in the ACT regime those years ago some of it was paid early.

As you say, broadly retain 20% of income for CT in a low salary high dividend environment and you are unlikely to go far wrong.

[Diestl]

If I have a gross turnover of 70k in a year.

I pay a minimal salary to myself to just below the standard threshold @5k a year?. Assume 5k expenses a year. leaves 60k, less 19% CT, leaves 48600.

Now the company has me as a 60% shareholder and partner (not married) as 40% shareholder. I pay a £2600 monthly divi to myself and £1600 divi to partner monthly. This totals to 48000 paid out a divis a year and leaves 600 quid in the company.

Now My annual income is around 36000 and partners is 19200, both below higher tax rate, so no more tax to pay?

Is there any problem with this?

[VectraMan]

Now My annual income is around 36000 and partners is 19200, both below higher tax rate, so no more tax to pay?

Is there any problem with this?

Exactly the reason behind S660. Look at the link over there ---->

[Diestl]

Stopped reading after Husbands and Wives, Im not married so doesn't apply.

Edit
Read further and is a bit vague on if it applies to non married couples? Anyway Ill assume Bastard Brown includes me, is there any way round it?

[VectraMan]

Stopped reading after Husbands and Wives, Im not married so doesn't apply.

Edit
Read further and is a bit vague on if it applies to non married couples? Anyway Ill assume Bastard Brown includes me, is there any way round it?

Husband and wife is just the classic example. As with all these things it's open to intepretation, but amounts to are you using the arrangement to avoid tax? If your partner has no other income, doesn't contribute to the business, but still contributes to the bills/rent/mortgage that otherwise you'd be paying, then it's hard to argue that it's anything other than about avoiding tax.

[Diestl]

No she will be doing the books and other administrative stuff.