Reply to: Pre-pay Dividends to avoid next year's tax?

[landl]

Some people have personal circumstances which means that higher rate tax is unavoidable. If for example you have a lifestyle that requires £80k of income but you are single and can't therefore pay a dividend to a spouse then higher rate tax is inevitable. So yes, I'd imagine there will be a few on here that do so.

Yes of course you're right.

I suppose every person has to weigh up whether their spending brings them an improvement in lifestyle that justifies the tax man's share, or whether they'd prefer to use that money as a buffer or an income for quality time between contracts. I've only been contracting for a few years now, so not yet at the point where the war chest is so large that I can hear it screaming "spend me, spend me".

Hopefully that time will come...

[Alan @ BroomeAffinity]

@FredBloggs

There's a difference:

2010-11
Salary (£110 X 52) = £5720.00
GROSS Dividend = (£43,875 - £5720) = £38155
NET Dividend = £38155 X 0.9 = £34339
Total NET income = £40059

2011-12
Salary (£139 X 52) = £7228
GROSS Dividend = (£42,475 - £7228) = £35247
NET Dividend = £35247 X 0.9 = £31722
Total NET income = £38950

Salary figures are based PEL for NIC.

[Fred Bloggs]

Thank you for posting this, you just saved me from a few hundred pounds of extra tax! I was forgetting to divide the Net Dividend by 0.9 in my calculations to get the Gross.

Bit depressing looking at what this does to available dividends for 2011-12 with the reduced allowances before the higher rate kicks in. Oh well, suppose it means more in the war chest for between contracts.

Just out of interest, does anyone here suffer the extra tax and actually pay themselves an income that substantially crosses over to the upper rate?

AIUI, if you pay yourself just upto the reduced 11/12 40% threshold in salary and divi's then the increase in personal allowance combined with the reduction on 40% threshold should leave you with the same after tax income in 11/12 as you had in 10/11. Anyone care to confirm or otherwise on that?

[Alan @ BroomeAffinity]

Just out of interest, does anyone here suffer the extra tax and actually pay themselves an income that substantially crosses over to the upper rate?

Some people have personal circumstances which means that higher rate tax is unavoidable. If for example you have a lifestyle that requires £80k of income but you are single and can't therefore pay a dividend to a spouse then higher rate tax is inevitable. So yes, I'd imagine there will be a few on here that do so.

[landl]

The higher rate threshold in 10/11 is gross income totalling £43,875 (Personal allowance £6475 + Basic Rate Band £37,400). Assuming your personal income is simply salary and dividends, to work out what "gap" you have left before breaching the HR limit is working out what your gross income is first. This is gross salary + gross dividends.

The dividends you declare and pay from your company to yourself is a net dividend. To work out the gross, you simply divide the net by 0.9

When working out whether you hit the higher rate threshold, you can use the calculation:

Gross income from employment in the tax year X (J)
Gross income from dividend (net dividend / 0.9) X (K)
Other income e.g. rental profit, gross bank interest X (L)

Total gross income X (M) = (J) + (K) + (L)

Less Higher Rate Threshold (10/11) 43,875 (N)

Gross before HR tax X (O) = (N) – (M)

Thank you for posting this, you just saved me from a few hundred pounds of extra tax! I was forgetting to divide the Net Dividend by 0.9 in my calculations to get the Gross.

Bit depressing looking at what this does to available dividends for 2011-12 with the reduced allowances before the higher rate kicks in. Oh well, suppose it means more in the war chest for between contracts.

Just out of interest, does anyone here suffer the extra tax and actually pay themselves an income that substantially crosses over to the upper rate?

[mudskipper]

Just1morethen's comment on this is correct (and it should be, he is an accountant).

If the OP has issued another invoice before 5th April, then that (less the tax of course) counts as profit and can justify a dividend, even if that invoice is not paid before 5th April.

If the OP has not issued another invoice then any payment could not be treated as a dividend. It might still be possible to do something, maybe not, but these scenarios show why a decent accountant is a must-have.

Agreed - my SJD spreadsheet shows 'Dividends available' from what I've invoiced, not from what's been paid.

[Gonzo]

I don't think you can do this as dividends can only be paid out of profits and this is not profit. So taking the company's tax money out would have to be treated as a director's loan.

Anyone know for sure?

Just1morethen's comment on this is correct (and it should be, he is an accountant).

If the OP has issued another invoice before 5th April, then that (less the tax of course) counts as profit and can justify a dividend, even if that invoice is not paid before 5th April.

If the OP has not issued another invoice then any payment could not be treated as a dividend. It might still be possible to do something, maybe not, but these scenarios show why a decent accountant is a must-have.

[Wanderer]

I have already paid out in dividends all of the retained profits for my company from the 10/11 tax year. The bank account now only contains Company Tax owed, NI(Employer/Employee) owed and PAYE owed. If I paid a further £2902.40 in dividends this would essentially be using the Company Tax "pot" which is simply sitting there until Jan 2012.

I don't think you can do this as dividends can only be paid out of profits and this is not profit. So taking the company's tax money out would have to be treated as a director's loan.

Anyone know for sure?

[Alan @ BroomeAffinity]

FreeAgent generates a Dividend Declaration whenever you classify a payment as a dividend. This sets out the dividend amount, tax credit and shareholders paid share. It stores this in your account on-line and I also download a pdf copy to keep on my local machine. Suffice?

Probably. Haven't used FreeAgent so can't comment on what they provide. You should have a dividend voucher and minutes of meeting declaring the dividend.

[Sockpuppet]

Assuming I don't go run out and spend my money willy nilly could I not just "reinvest" in the company by sending the money back if that April 7th payment never materialises?

Yes just declare the dividend and mark it down as a directors loan (i.e. money that the company owes to you). If the money never comes then you've not lost the allowance and the company can hold on to that loan from you and work it off.

Best of both worlds.

[tyut4669]

Remember to have sufficient profits to be able to declare dividends.

[nfoote]

But be careful and make sure you are keeping the correct dividend paperwork. You are keeping dividend paperwork?

FreeAgent generates a Dividend Declaration whenever you classify a payment as a dividend. This sets out the dividend amount, tax credit and shareholders paid share. It stores this in your account on-line and I also download a pdf copy to keep on my local machine. Suffice?

[Alan @ BroomeAffinity]

Dipping into your tax money to pay a dividend is risky, but as long as you can ultimately cover your liabilities shouldn't be a problem in reality. If you're awaiting a payment due on April 7th it would be a shame to lose out on your allowance by waiting those extra couple of days. Of course if the money doesn't show up, you may then have a problem.

For a distribution to be a dividend, the company muist have retained profits from which to pay it. The money you have set aside for VAT and CT is NOT retained profits. However, if you have an invoice due which has not been paid then this money due is profits and you can probably safele set the one against the other. But be careful and make sure you are keeping the correct dividend paperwork. You are keeping dividend paperwork?

[nfoote]

Just to add, yes it's a good idea to pay yourself right up to the upper limit in dividends, as you'll lose the years allowance forever if you don't.

Dipping into your tax money to pay a dividend is risky, but as long as you can ultimately cover your liabilities shouldn't be a problem in reality. If you're awaiting a payment due on April 7th it would be a shame to lose out on your allowance by waiting those extra couple of days. Of course if the money doesn't show up, you may then have a problem.

Assuming I don't go run out and spend my money willy nilly could I not just "reinvest" in the company by sending the money back if that April 7th payment never materialises?

[VectraMan]

Just to add, yes it's a good idea to pay yourself right up to the upper limit in dividends, as you'll lose the years allowance forever if you don't.

Dipping into your tax money to pay a dividend is risky, but as long as you can ultimately cover your liabilities shouldn't be a problem in reality. If you're awaiting a payment due on April 7th it would be a shame to lose out on your allowance by waiting those extra couple of days. Of course if the money doesn't show up, you may then have a problem.