Reply to: new to contracting and dividends

[TheCyclingProgrammer]

You can setup a Directors Loan account and draw money against that, declaring a dividend each quarter or at year end to clear it.

There is no need for a formal dividend declaration each month, as you need to work out your profit to be sure you can legally declare any divi.

This is a potentially risky approach - particularly clearing it annually. If your DLA exceeds £10k then you need to pay interest on the balance or pay tax on the BIK. If you forget to clear it before the year end then it needs to be shown in your accounts and risks a s455 charge if it remains outstanding after a further 9 months.

Far simpler to just declare a dividend quarterly and be done with it.

[northernladuk]

You can setup a Directors Loan account and draw money against that, declaring a dividend each quarter or at year end to clear it.

There is no need for a formal dividend declaration each month, as you need to work out your profit to be sure you can legally declare any divi.

That's very complicated for a newbie. Ot really the way forward I would have thought.

The rules have changed around DL accounts so get it wrong and you'll have to pay the whole loklt as income.

[highlandspring]

Loans

You can setup a Directors Loan account and draw money against that, declaring a dividend each quarter or at year end to clear it.

There is no need for a formal dividend declaration each month, as you need to work out your profit to be sure you can legally declare any divi.

[Lance]

Agree with everything everyone said. But, if the accountant really has a problem with it and you don't want the hassle of arguing with him, take a director's loan in month one, pay a dividend in month two big enough to live on for three months, and pay back your director's loan. Then, take a dividend every two months.

If he's got a problem with dividends every two months, maybe get another accountant....

THIS ^^^^^^

If the accountant says he doesn't like it tell him you'll bring it up at the next monthly board meeting, where you agree to issue another dividend and choose to igmore the accountant.
Send him the minutes and the dividend certificate and ask him if you should find another accountant who will do what he's instructed.
His job is to advise you. You don't have to take his advice, especially when it's BS.

[WordIsBond]

Agree with everything everyone said. But, if the accountant really has a problem with it and you don't want the hassle of arguing with him, take a director's loan in month one, pay a dividend in month two big enough to live on for three months, and pay back your director's loan. Then, take a dividend every two months.

If he's got a problem with dividends every two months, maybe get another accountant....

[northernladuk]

You still need to produce minutes and insert the data in the software... I know isn't much work, but still more if you do it monthly vs quarterly.

Erm. No its not and no you don't. Takes seconds once your bank feed has updated. Do you use FA?

[CryingSheep]

Looking at their website they off Freeagent as a tool so absolutely nothing for them to do. They will advise the OP what the most efficient salary/dividend threshold is but it's up to the OP to divi what he wants/needs. It's not for them to govern or manage his thresholds so doubt it's that.

You still need to produce minutes and insert the data in the software... I know isn't much work, but still more if you do it monthly vs quarterly.

[Maslins]

No legal reason why you can't take monthly dividends, or even daily. However, I'd recommend opting for relatively infrequent larger round lump sums. Main reason being it's just easier to keep track of. Having said that, a consistent monthly dividend (same amount and taken at same time) is easy to keep track of too. We do sometimes see clients get in a bit of a pickle with these if for example they end up taking their April dividend on 6th one year, then on 5th next year, hence 13 dividends in the tax year. Could be fine, but of course many will have nicely worked out 1/12 of their basic rate band so get a bit scuppered by this.

If I were in your shoes, take a monthly one for the first few months, but try to live a little frugally. Hopefully you can then drift to quarterly/similar.

[TheCyclingProgrammer]

I know of no cases where HMRC have successfully argued that monthly dividends (that are done legally with all of the requisite paperwork and sufficient profits) are actually "salary" so I suspect this is one of those things that some accountants advise against for no real reason. Cargo cult accountancy advice.

It may also date from a time where declaring a dividend required manually drawing up company minutes, shareholder vouchers and and bring management accounts up to date to ensure there is sufficient profits for a dividend to be declared and the accountants had to do it for their clients.

In 2019, when you can use software like FreeAgent or Xero which a) always give you a reasonably accurate overview of your distributable reserves as long as you keep them up to date and b) can generate dividend documents for you with a click, it's not that much hassle. That said, I pay mine quarterly because it's still less paperwork to keep on top of.

[xenomorph]

Yes. FreeAgent will tell you exactly what the distributable amounts are... but factor in my comment above.

If you are unsure get NASA to talk you through FA's interface so you know which numbers to look at.

In fact scratch that.. Here it is..

FreeAgent user – how much dividend can/should I take? | Chris Maslin's blog

cheers will look into that

and yes no plans to take out more then 40% a month out of company.
In terms of first 6 months I will need to be careful.

[northernladuk]

Sorry new to this.
Would my accountant software tell me the projected post tax profits?
Amount I want to withdraw is about 40% of payments to company a month.
Do you mean as long as its taken from company money after corporation tax?

Yes. FreeAgent will tell you exactly what the distributable amounts are... but factor in my comment above.

If you are unsure get NASA to talk you through FA's interface so you know which numbers to look at.

In fact scratch that.. Here it is..

FreeAgent user – how much dividend can/should I take? | Chris Maslin's blog

[northernladuk]

Oh, slightly unrelated but very important. Assuming you are happy with the fact you take dividends from profit, i.e. after your tax liabilities have been covered and put to one side. You cannot divi every penny of your first payment for example. Some of that is tax money and not the businesses.

But, let's say you understand the above..

Your main focus in the first few months is your warchest. Gigs will end and you'll be left with no income. You need a pot of money behind you to cover your outgoings when the business has no income. People say 3 months absolute minimum, 6+ months on the safer side and a year to be able to carefree.

IMO you should be paying yourself the absolute minimum to live in the first 3-6 months or so and get this pot up. Your contract could end tomorrow and you don't have a penny to live off until you find your next gig.

Sounds overkill but I have seen grown men crying when their gig got cut short and they've spent everything. People in this position will dip in to the tax pot and that does not end well.

[xenomorph]

Dividends are paid out of profits. One would have to be very careful to ensure that your dividend does not exceed your projected post-tax profits for the year... or you'd be running a directors loan account balance that would have to be repaid at the end of the accounting year.

Keep a very close eye on this; other contractors have been caught out by their laziness in such matters.

Sorry new to this.
Would my accountant software tell me the projected post tax profits?
Amount I want to withdraw is about 40% of payments to company a month.
Do you mean as long as its taken from company money after corporation tax?

[northernladuk]

hi all
I am due to start contracting this month.
My accountants NASA are advising against monthly dividends but I have rent and bills to pay so its not possible for me to have no income every month.
Has there been any issues with HMRC recently around people taking monthly dividends?
Thanks

You can take dividends when you want as long as it's from profits. Some may argue it looks like a monthly salary so leading to think you are a disguised permie but this is rubbish. Salary and dividends couldn't be more different so the fact they are paid monthly is meaningless.

I've also heard that during investigations taking a set amount each month with no regard to actual income/profit can raise a red flag and HMRC may attempt to argue it should be re-classified as income but I've only heard that once or twice in many many discussions about monthly divis when the consensus is fine. If you really want to be safe then just vary the amount per month.

Out of interest I'd go back to them an ask exactly why but either way I don't think it matters. As a director you can claim dividends every single day if you want.

In time you'll get enough in the bank that you'll be able to divi less but for more and eventually get to the stage you can pay a divi to yourself once a year just after April and stick it in a high interest ISA.

Probably the issue is for the accountant that will have more work paying dividends every month and will make a bit harder to make sure you keep your dividends payment as tax efficient as possible.

Looking at their website they off Freeagent as a tool so absolutely nothing for them to do. They will advise the OP what the most efficient salary/dividend threshold is but it's up to the OP to divi what he wants/needs. It's not for them to govern or manage his thresholds so doubt it's that.

[wattaj]

hi all
I am due to start contracting this month.
My accountants NASA are advising against monthly dividends but I have rent and bills to pay so its not possible for me to have no income every month.
Has there been any issues with HMRC recently around people taking monthly dividends?
Thanks

Dividends are paid out of profits. One would have to be very careful to ensure that your dividend does not exceed your projected post-tax profits for the year... or you'd be running a directors loan account balance that would have to be repaid at the end of the accounting year.

Keep a very close eye on this; other contractors have been caught out by their laziness in such matters.