Reply to: Personal Pension Contributions and Effect on Dividend Payments at 7.5% Rate

[Paralytic]

hmmmm.....
I think you mean the dividend was declared, and paid on March 31st but into your Director's loan account.....

Yes, that's what i meant. I really should proof read what i write before potsing.

What does your accountant say about a retrospective declaration?

They're fine:


As the dividend has been declared it can be paid whenever so if this was entered on 31/03 as a dividend then it will go through in the 2018/19 tax return even though it hasn't been paid until now.

In the accounts this will just show as directors loan account for you.

Unbelievably relaxed attitude to breaking the law and backdating a dividend 8 months after the event.

And yet you will moan that off-payroll is ruining things for you

No I won't.

[craigy1874]

Unbelievably relaxed attitude to breaking the law and backdating a dividend 8 months after the event.

And yet you will moan that off-payroll is ruining things for you

[Lance]

Thanks. And, as it turns out, I did actually pay myself the max dividend at the 7.5% tax bracket. The dividend was declared on 31st March, but only paid out this month...

hmmmm.....
I think you mean the dividend was declared, and paid on March 31st but into your Director's loan account.....

if an interim dividend is declared on 31st March 2016, but not actually paid until 30th April 2016, then the date of the dividend will be 30th April 2016 and it will fall into the new tax regime

What does your accountant say about a retrospective declaration?

[Paralytic]

Simple answer, yes you could have paid yourself more dividends at 7.5%

Pension just like gift aid increases your basic rate bracket so your bracket would increase and no longer be £46,350 for 18/19.

Thanks. And, as it turns out, I did actually pay myself the max dividend at the 7.5% tax bracket. The dividend was declared on 31st March, but only paid out this month...

[chrisl]

Correct

Simple answer, yes you could have paid yourself more dividends at 7.5%

Pension just like gift aid increases your basic rate bracket so your bracket would increase and no longer be £46,350 for 18/19.

(Before anyone says speak to your accountant, this is for my self-assessment, not for my PSC, and I do my own personal finances)
(Before anyway says speak to an accountant anyway, then please move on - that is what the internet is for)

I'm looking at my 2018-19 self-assessment and trying to work out what Dividend I paid myself (sorry, could have paid myself ) on March 31st 2019, so as to maximise the Dividend amount but limit the tax due to the 7.5% rate.

In January 2019, I paid (from personal funds) the max amount I could into my Personal Pension based on my earned income. This was £11,850 gross, matching my salary for that tax year. I paid £9,480 (net amount) from my personal bank account and my pension provider topped it up with the tax relief.

The question is, in my self assessment tax return, there is the field that asks for:

"Payments to registered pension schemes (Also known as PPR) where basic tax relief will be claimed by your pension provider (called Relief at source). Enter the payments and basic tax rate"

The help page for that field is here: HMRC: Help

When I enter the gross £11,850 amount here, and amend the rest of my return, it effectively means I can (sorry, could have ) paid myself and additional £11,850 in dividends for the 2019-2020 tax year at the 7.5% tax rate.

Is that right? I think it is, but have this niggling doubt since the £11,850 already contains the 20% tax relief credit?

Adding the pension amount also adds this commentary to the "Full Calculation" page on the tax return



Am I missing something here?

[WordIsBond]

Oh, and are you familiar with the name Darren Upton? The attitude to an accountant should be "Trust but verify." That means learning enough to understand his advice, not just slavishly following it.

[WordIsBond]

Again in a simplistic way, as long as the company retains sufficient funds to cover its tax liabilities at any one point in time, then clearly it is solvent and trading correctly. Although companies are not obliged to pay CT until 9 months after their year end, my understanding is that the CT due must in theory be in the company funds the day after the year end.

Please correct me if my perceptions are wrong.

Yes, the CT should be in the company funds the day after the year end. Not sure about the legality but practically they should be in the company funds from the time the profit is earned.

If you have revenue of £10K in month one of your year, and pay £1K in salary and other expenses, you have £9K in profit. That £9K will incur approximately £1.7K of CT. If you are running your business with any sense at all, you'll put that £1.7K into a company savings account, and leave it there for 20 months, and do the same with every month's profit. You should never pay out dividends that exceed the after-tax profit, even if the tax isn't due yet.

[JohntheBike]

If a dividend is declared that is greater than the sum of current profit and any retained profit, minus any corporation tax liability, it is illegal.
The consequences are unlikely to be a a problem unless you fail to pay CT or go bankrupt.
There is no minimum dividend so you can go below that to keep you under a tax threshold on personal tax.
The consequences of NOT doing this is you could pay more personal tax.

How long have you been contracting? You give the impression that it's been a long time, but this is a really basic question, and demonstrates a staggering level of ignorance.

I've been contracting for 23 years and I declare what dividend my accountant tells me to. Perhaps my thinking has been too simplistic.

Clearly I'm not an accountant, and so don't have an appreciation of the finer points of company accounting laws, but I always remind him that I wish to continue my business in the most appropriate legal way. To that end, I have always paid all tax bills in full and on time.

However, I am aware that companies can report a loss year in year out and still be allowed to trade. However, there must always be an operating profit. Clearly in a simplistic way, unless there is a bank overdraft, companies cannot spend more money that they earn. So, in effect should always show an operating profit.

Again in a simplistic way, as long as the company retains sufficient funds to cover its tax liabilities at any one point in time, then clearly it is solvent and trading correctly. Although companies are not obliged to pay CT until 9 months after their year end, my understanding is that the CT due must in theory be in the company funds the day after the year end.

Please correct me if my perceptions are wrong.

[Lance]

OK, given that my perception appears to be wrong regarding dividends, I don't know how to ask the question correctly, but I'll try. If the dividend declared is greater than the profit actually earned, what would the consequence be and vice versa, i.e. if the dividend declared is less than the profits earned, what are the consequences? Additionally, is either course of action illegal?

If a dividend is declared that is greater than the sum of current profit and any retained profit, minus any corporation tax liability, it is illegal.
The consequences are unlikely to be a a problem unless you fail to pay CT or go bankrupt.
There is no minimum dividend so you can go below that to keep you under a tax threshold on personal tax.
The consequences of NOT doing this is you could pay more personal tax.

How long have you been contracting? You give the impression that it's been a long time, but this is a really basic question, and demonstrates a staggering level of ignorance.

[JohntheBike]

Dividends should only be declared up to a maximum of the profits made by the company (not forgetting to allow for the tax due on those profits.) These profits may be from the current or previous tax year (in which case the CT may not yet have been paid) or retained profits from previous years (in which case it will have been.)

If dividends are declared which exceed the post-tax profits available, they should be reclassified as shareholder/director loans. This may have tax consequences on the individuals concerned.

There is no problem whatsoever with "underpaying" dividends. You don't have to distribute every last available penny as dividends - it can just be held in the company until required. There is no dividend tax on the profits thus retained unless and until they are paid as dividends.

Finally, the sentence "dividends are declared to cover drawings from the company which are not allowed as expenses" is rather oddly worded. The drawing should be a consequence of the declaration of a dividend, not vice versa.

OK, thanks for the explanation. Clearly I take the advice of my accountants as to how much dividend to declare.

[Amanensia]

Dividends should only be declared up to a maximum of the profits made by the company (not forgetting to allow for the tax due on those profits.) These profits may be from the current or previous tax year (in which case the CT may not yet have been paid) or retained profits from previous years (in which case it will have been.)

If dividends are declared which exceed the post-tax profits available, they should be reclassified as shareholder/director loans. This may have tax consequences on the individuals concerned.

There is no problem whatsoever with "underpaying" dividends. You don't have to distribute every last available penny as dividends - it can just be held in the company until required. There is no dividend tax on the profits thus retained unless and until they are paid as dividends.

Finally, the sentence "dividends are declared to cover drawings from the company which are not allowed as expenses" is rather oddly worded. The drawing should be a consequence of the declaration of a dividend, not vice versa.

[JohntheBike]

No. Dividends are profits being paid to shareholders.


Really????


You're going to have to ask that question in a way which makes sense.

You're going to have to ask that question in a way which makes sense

OK, given that my perception appears to be wrong regarding dividends, I don't know how to ask the question correctly, but I'll try. If the dividend declared is greater than the profit actually earned, what would the consequence be and vice versa, i.e. if the dividend declared is less than the profits earned, what are the consequences? Additionally, is either course of action illegal?

[Lance]

My understanding is that dividends are declared to cover drawings from the company which are not allowed as expenses.

No. Dividends are profits being paid to shareholders.

The dividend tax seems to have muddied the waters now.

Really????

So what would the effect be if the dividend was under declared and also over declared?

You're going to have to ask that question in a way which makes sense.

[JohntheBike]

Covering drawings with dividend declaration

My understanding is that dividends are declared to cover drawings from the company which are not allowed as expenses. The dividend tax seems to have muddied the waters now. So what would the effect be if the dividend was under declared and also over declared?

[WordIsBond]

How would that work? I’d still have £9.5K sitting in a low interest savings account. Instead, I have £12K in my pension pot.

I wasn’t in a position to commit company funds then (contract was ending in March) but can now. And I can save the CT tax now (by using the remainder of last years pensions allowance) and I’ll not paying any more than 7.5% dividend tax, so I’m not sure what saving could have been there?

If you couldn't commit company funds then, that would have complicated it.

But you could have loaned the funds to your company, and then made the contribution from your company.

It's not an immense savings as long as you are staying out of the higher rate band.