Reply to: Tax year for dividends

[Jessica@WhiteFieldTax]

I've been caught out by this even after I aligned my company year April-March by the handful of days discrepancy between personal and company tax years, e.g. paying a year-end dividend on 3rd April and wondering why things don't add up

But I'm not an accountant!

It fairly common, I would say much more common than not, to use the accounts figure for personal tax if its a 31 March year end. The opposite to the confusion you had on a 3 April dividend, is the number of clients, and tax office bods, who would be confused if accounts and self assessment weren't the same.

IMV with a 31 March year end, cutting off dividends at 31 March has a lot of merit, and is probably common place, save for the times, and they do come up, where you explicitly want to use 1 to 5 April, eg you want to use tax allowances up but equally make the year end look stronger (less likely for a contractor, more likely for a more complex business).

The situation the OP describes used to be fairly common a couple of decades back (feeling my age), but its now out of favour, except for the messy cases where clients use company bank account as piggy bank with contemporaneous allocation to dividend etc. Back in the midst of time, there used to be three ways for directors remuneration to be taxed - actual, accounts or prior year - it seems quite unbelievable now - but the point is, there historically was fluidity in how dividends and salary were linked from accounts to personal returns.

All that said, OP is right to query it an be concerned.

[Jessica@WhiteFieldTax]

Unfortunately, they are like the medical and legal profession when it comes to professional responsibility. Rarely does one get a result from a complaint against any 'profession'. They close ranks and stick together.

No, you'd think, but honestly it doesn't. Most accountants seem quite happy to screw a competitor, and its actually quite depressing as all it does is generate ill will and lower the whole professions standing in clients eyes.

Look at this another way. You go into a new contract and things are a mess. Do you cover up for the previous permies or contractors, or tell it as it is.

[tractor]

...

Sure, it's your responsibility, ultimately, but that doesn't mean they've met the terms of their professional accreditation(s), assuming they have any, so it's probably worth filing a complaint, perhaps with the assistance of your next accountant.

Unfortunately, they are like the medical and legal profession when it comes to professional responsibility. Rarely does one get a result from a complaint against any 'profession'. They close ranks and stick together.

[TheCyclingProgrammer]

Yeah, if they have left me open for any fines/additional taxes require paying I will be seeing if I can prise any of that cost out of them.
However as I have to sign everything they submit, I guess in the end it comes back to its all my fault cos I signed that I agree with it and as director its my responsibility.

Well yes, but there's mis-understanding advice/not paying attention and then there's just plain wrong advice. If you can't trust what your accountant says to be accurate, what are you paying them for?

But going forward, it is definitely worth getting your head around as much as possible when it comes to running a company and tax as you can. The more clued up you are, the less likely you are to have problems.

[TheCyclingProgrammer]

I know its not quite right, but as a rough guide I've just been totalling my dividends and salary and setting the limit as £32k, that way I figured I have a little bit of leeway .

It's roughly £41k including the personal allowance, typically a £10k salary and £31k dividends - but remember that's the *gross* dividend amount. The net amount you withdraw is just short of £28k.

[jamesbrown]

Yeah, if they have left me open for any fines/additional taxes require paying I will be seeing if I can prise any of that cost out of them.
However as I have to sign everything they submit, I guess in the end it comes back to its all my fault cos I signed that I agree with it and as director its my responsibility.

Sure, it's your responsibility, ultimately, but that doesn't mean they've met the terms of their professional accreditation(s), assuming they have any, so it's probably worth filing a complaint, perhaps with the assistance of your next accountant.

[Graham]

Holy crap. Aside from changing accountant, if they're accredited, you should consider making a complaint. These guys are obviously complete cowboys. Better luck next time (and stick to one of the regular posters/companies on CUK)!

Yeah, if they have left me open for any fines/additional taxes require paying I will be seeing if I can prise any of that cost out of them.
However as I have to sign everything they submit, I guess in the end it comes back to its all my fault cos I signed that I agree with it and as director its my responsibility.

[jamesbrown]

This is how the conversation went...

Holy crap. Aside from changing accountant, if they're accredited, you should consider making a complaint. These guys are obviously complete cowboys. Better luck next time (and stick to one of the regular posters/companies on CUK)!

[Graham]

When I first read this I assumed you had misunderstood what your accountant said. But looking at your most recent post, it seems that is unlikely and that you are being woefully badly advised. I'd especially worried about them suggesting this:

Yeah, I always got the feeling they were perhaps being a bit creative in the way the accounts were done, which I figured was probably normal.
But since speaking to them in November and what I've been able to find out since, I think I am best stepping away ASAP and having someone check through it all to make sure I've got no liabilities unpaid from it all.

I was hoping it was me misunderstanding them, but I think that's looking pretty unlikely.

[Alan @ BroomeAffinity]

When I first read this I assumed you had misunderstood what your accountant said. But looking at your most recent post, it seems that is unlikely and that you are being woefully badly advised. I'd especially worried about them suggesting this:

- Add someone as a shareholder (can't remember which type they said) and give them Z amount then get them to give me the money (funny enough, I discounted this option straight away)

[Graham]

What you have described is absolutely incorrect.

It has even worse connotations because the first time they did it, you may have overpaid tax that you may not now recover. When you correct this, you need to check that AND make sure that the last time it was calculated using that method, you did not underpay.

Thanks, so it does seem its not just me misunderstanding it, they seem to have done it wrong somehow?

First thing I am going to ask the new accountants when they take over is to check through all my previous years so far, in case I need to go hat in hand to HMRC to rectify anything.

OK, I'm seriously struggling to think of any possible way that what they have done can be correct.

Nope, can't think of anything. Your personal tax liability is calculated by the income you take during the normal tax year.

Take your expected total salary for the 2014/15 tax year. Add up all the dividends you've taken since the beginning of the tax year in April, gross them up (divide by 0.9) to account for the tax credit and add them to your salary. This is your gross total earnings (or expected total if you take no further dividends).

Now subtract your personal allowance of £10k. Work out the difference between the remainder and the higher rate tax threshold to see how much you've got left. This is your remaining gross dividend. Multiply times 0.9 and that's how much you can take from the company (net).

Edit: forgot to say - then get a new accountant and ask them to check your last few years tax returns as they may well be wrong. Keep fingers crossed that you don't have an unexpected tax bill.

I know its not quite right, but as a rough guide I've just been totalling my dividends and salary and setting the limit as £32k, that way I figured I have a little bit of leeway


To be honest, theres other things about the way they've had me doing things which now I've begun questioning everything because of the dividends thing, I'm dubious about too, but I'll leave them as questions for the new accountants.


My new accountants (presumably they don't mind me quoting them) have already suggested this about what the current/old accountants have done...

I have seen this done before by other accountants, but it is definitely not the best way to do things.

The way that they do it is to let a directors loan balance accumulate over the course of the year, and then clear it with a large dividend at the end of your company year. If this is what has been done, then there would be additional tax implication of having taken the director's loans.

To do things correctly, you should declare dividends (and draw up relevant paperwork) during teh year when you want to take the funds - not just at the end of the year.

[TheCyclingProgrammer]

OK, I'm seriously struggling to think of any possible way that what they have done can be correct.

Nope, can't think of anything. Your personal tax liability is calculated by the income you take during the normal tax year.

Take your expected total salary for the 2014/15 tax year. Add up all the dividends you've taken since the beginning of the tax year in April, gross them up (divide by 0.9) to account for the tax credit and add them to your salary. This is your gross total earnings (or expected total if you take no further dividends).

Now subtract your personal allowance of £10k. Work out the difference between the remainder and the higher rate tax threshold to see how much you've got left. This is your remaining gross dividend. Multiply times 0.9 and that's how much you can take from the company (net).

Edit: forgot to say - then get a new accountant and ask them to check your last few years tax returns as they may well be wrong. Keep fingers crossed that you don't have an unexpected tax bill.

[tractor]

.....

Thanks for the replies everyone

Its possible I didn't understand them properly, but I thought I did. They basically just seemed to be saying that say, for my 2014-2015 personal tax return, the amount of dividends I took from the company in the company 2014-2015 tax year is what would be taken into account. So for example, if I took £10k april-april but 15k feb-feb, they would be putting 15k on my personal tax return.

This is how the conversation went...
In November I asked my accountant how much more I could withdraw as dividends this year without pushing myself over into the higher tax bracket and then having to pay (more) tax/student loan on the dividend(s) taken.

I calculated it to be roughly £10k I could take before hitting the limit, because I have only taken X amount since last April.

My accountant said you can't take any more without going over the limit because you've already taken Y amount.
I then questioned this because my amount (X) was so different to theirs (Y) and they said that for dividend totals for personal tax returns they use the company tax year. So I had taken Y amount since last February.

They then went on to say that my options for getting more money are...
- Take more now and pay tax/student loan on it
- Wait until February and then you can take more as it will be a new tax year for dividends
- Add someone as a shareholder (can't remember which type they said) and give them Z amount then get them to give me the money (funny enough, I discounted this option straight away)

What you have described is absolutely incorrect.

It has even worse connotations because the first time they did it, you may have overpaid tax that you may not now recover. When you correct this, you need to check that AND make sure that the last time it was calculated using that method, you did not underpay.

[Graham]

Thanks for the replies everyone

Its possible I didn't understand them properly, but I thought I did. They basically just seemed to be saying that say, for my 2014-2015 personal tax return, the amount of dividends I took from the company in the company 2014-2015 tax year is what would be taken into account. So for example, if I took £10k april-april but 15k feb-feb, they would be putting 15k on my personal tax return.

This is how the conversation went...
In November I asked my accountant how much more I could withdraw as dividends this year without pushing myself over into the higher tax bracket and then having to pay (more) tax/student loan on the dividend(s) taken.

I calculated it to be roughly £10k I could take before hitting the limit, because I have only taken X amount since last April.

My accountant said you can't take any more without going over the limit because you've already taken Y amount.
I then questioned this because my amount (X) was so different to theirs (Y) and they said that for dividend totals for personal tax returns they use the company tax year. So I had taken Y amount since last February.

They then went on to say that my options for getting more money are...
- Take more now and pay tax/student loan on it
- Wait until February and then you can take more as it will be a new tax year for dividends
- Add someone as a shareholder (can't remember which type they said) and give them Z amount then get them to give me the money (funny enough, I discounted this option straight away)

You and your company are separate entities. Your company year can be any dates you want them to providing you take the appropriate actions. They are entirely seperate from your personal tax year which, like everyone else in the country runs from April 6th to the next April 5th. For personal taxation purposes, the dividend payment date falls on the date the dividend was voted and for personal taxation, this is the important date and it determines which tax year the payment falls into. If you have taken drawings between an arbitrary date and the voting date, any such drawings must be treated as a Directors Loan and accounted for as such (which has a number of other connotations that you need to be aware of). At the voting date you are then able to adjust the Directors Loan Account and reduce it by any amount up to the amount of the dividend if you wish.

Yeah this is the way I was viewing it.

So for example, if I took dividends throughout the year as...
February 2014 - £10,000
August 2014 - £10,000

I would view that as being £10k in 2013-2014 personal tax and £10k in 2014-2015 personal tax.
However my accountant seems to be saying that would all be 2014-2015 personal tax.

I think they must be doing it all as a directors loan account, which I hadn't realised, am going to re-read all the paperwork I've had from them before but I don't remember seeing anything that hinted at this before.

[d000hg]

I've been caught out by this even after I aligned my company year April-March by the handful of days discrepancy between personal and company tax years, e.g. paying a year-end dividend on 3rd April and wondering why things don't add up

But I'm not an accountant!