Reply to: Gross Dividend Greater Than Net Profit Allowed ?

[Craig at Nixon Williams]

Ok, I have everything sorted. My accountant is away, but one of the partners has looked at the figures and OK'ed them. Paperwork drawn up and ratified.

I now want to make payment, for the payment to myself am I ok to transfer from my business account to my personal account, or do I have to make an "official" transfer, i.e. CHAPS or something ?

If you have the paperwork drawn up then you can just make the payment from the business bank over to your personal account.

Craig

[scrollock]

Ok, I have everything sorted. My accountant is away, but one of the partners has looked at the figures and OK'ed them. Paperwork drawn up and ratified.

I now want to make payment, for the payment to myself am I ok to transfer from my business account to my personal account, or do I have to make an "official" transfer, i.e. CHAPS or something ?

[Craig at Nixon Williams]

HMRC make adding-up and taking-away turn into what seems like higher-maths!

FTFY

[stek]

To illustrate the interaction between the 25% and the 10% tax credit etc.

Net dividend: £90.00
Tax credit: £10.00
Gross Dividend: £100.00

Tax due at 32.5% of the gross is £32.50, deduct the £10 deemed to have been paid so the additional tax due is £22.50 – which is 25% of the £90 net dividend!

Craig

Accountants make adding-up and taking-away turn into what seems like higher-maths!

[Craig at Nixon Williams]

To illustrate the interaction between the 25% and the 10% tax credit etc.

Net dividend: £90.00
Tax credit: £10.00
Gross Dividend: £100.00

Tax due at 32.5% of the gross is £32.50, deduct the £10 deemed to have been paid so the additional tax due is £22.50 – which is 25% of the £90 net dividend!

Craig

[ASB]

Thanks, so in a nutshell as far as Myco is concerned it just a pays a dividend (gross or net is immaterial).

However as far as my personal finances are concerned, it has been paid net, I need to gross it up with the tax credit and add to other income to see where I sit tax allowances wise.

If I go into higher rates, then further tax is payable less the 10% credit.

Assuming you go into the higher rate, but not the additional rate (i.e. 40%) then there is 25% of the net dividend in that band to pay.

[Craig at Nixon Williams]

Thanks, so in a nutshell as far as Myco is concerned it just a pays a dividend (gross or net is immaterial).

However as far as my personal finances are concerned, it has been paid net, I need to gross it up with the tax credit and add to other income to see where I sit tax allowances wise.

If I go into higher rates, then further tax is payable less the 10% credit.

Yes, that sounds correct!

Craig

[scrollock]

Hope this helps!
Craig

Thanks, so in a nutshell as far as Myco is concerned it just a pays a dividend (gross or net is immaterial).

However as far as my personal finances are concerned, it has been paid net, I need to gross it up with the tax credit and add to other income to see where I sit tax allowances wise.

If I go into higher rates, then further tax is payable less the 10% credit.

[scrollock]

The unknown highlighted bit was why I thought it might have been inefficient. I assume (and hope) the other person is your spouse?

Yes

[Craig at Nixon Williams]

As others have said, if the net dividend is covered by the Profit after Tax then it is not illegal.

Whats happens to the 10% ? Does this need paying to HMRC, hence I am being double taxed ?

The 10% tax credit is not actually paid to HMRC by either the payer or the recipient of the dividend, think of it as a figure that is used only to calculate tax liabilities. Say you receive a dividend for £90, HMRC view that as you having been paid a dividend of £100 that has had £10 of tax deducted (even though there has not actually been any transaction for £10).

As a basic rate taxpayer if you have a dividend of £100 (including the 10% tax credit) then you will be charged 10% tax on the value (so £10) but will then be given credit for the tax that you are already deemed to have paid (again £10) so will have no additional tax to pay. Therefore as a basic rate taxpayer, despite the rate of 10% being published, the effective rate on the net dividend is 0%, for a higher rate taxpayer the published rate is 32.5% but the effective rate is 25% of the net.

You aren't being double taxed - for example lets say you have a net profit of £100 (before tax), pay CT of £20 and distribute the rest as dividends. As a basic rate taxpayer you will end up with £80 in your pocket after all taxes (a tax rate of 20%). As a higher rate taxpayer you will then pay (an effective rate of 25%) on the £80 distributed, so a further £20 in personal tax (plus the original £20 CT on the net profit) so the total tax paid on net profit in this scenario is £40 (so 40%).

Hope this helps!
Craig

[eek]

Thanks Eek, I work in an industry where the terms gross profit and net profit have different meanings, although I have known this for the 20 years in working in it that they differ from the standard definition.

It's my first year of contracting and they don't apply to me, only my clients, so my bad for getting it wrong.

I get the difference now between the corporate and personal, thanks!

I do have an accountant, but I'm in a rush to try and get the money out of my company so I can complete on a house.

In what way have I have done things in a tax efficient way ? I've taken the optimal salary according to my accountant, the divi will be split over two people. I'm leaving a tiny amount in the company, but this is money that is earmarked for other purposes.

The unknown highlighted bit was why I thought it might have been inefficient. I assume (and hope) the other person is your spouse?

[scrollock]

Well your first problem is that gross profit is not what you think it is.

Gross profit is profit from sales after accounting for cost of sales (i.e. it is the difference between revenue and the cost of making a product or providing a service).

Net profit is profit after all other expenses are taken into account.

Corporation tax is paid on net profit which in your case is £53206.

You can pay a dividend of anything up to the total of all net profits after tax which is £42565.

Dividend tax credits are entirely separate to the above as the tax credit relates to personal tax rather than company tax. 2 seconds on google gives you this from HMRC



so in your case you are fine. However what you have done

1) got basic terms totally wrong
2) not grasped the difference between corporate and personal
3) done things in what appears to have been a tax inefficient way.
4) Demonstrated that if you have an accountant you need to reread the basics guidebook they sent you (or they didn't send you one). Nixon Williams do a decent one from memory....


If you haven't actually got an accountant point 3 emphasises that you do probably need one.

Thanks Eek, I work in an industry where the terms gross profit and net profit have different meanings, although I have known this for the 20 years in working in it that they differ from the standard definition.

It's my first year of contracting and they don't apply to me, only my clients, so my bad for getting it wrong.

I get the difference now between the corporate and personal, thanks!

I do have an accountant, but I'm in a rush to try and get the money out of my company so I can complete on a house.

In what way have I have done things in a tax efficient way ? I've taken the optimal salary according to my accountant, the divi will be split over two people. I'm leaving a tiny amount in the company, but this is money that is earmarked for other purposes.

[Jeremiah@RHJAccountants]

My net profit is after corporation tax, hence my reserves once all liabilities have been taken care is £42,565

This is known as profit after tax not net profit as you stated in your first post hence the advice given.

The profit after tax or reserves is what you can pay net dividends out of.

So as mentioned by others you have got basic terms wrong and really probably need an accountant or speak to the one you have as they are best placed to advise you.

You will be able to explain to them you circumstance in full as there is only so much you can say on a public forum.

[eek]

re. Management rule 101, this is what is confusing me.

lets simply this a bit

Gross profit £25K

Less corporation tax, net profit £20k

I declare a gross dividend of £20k

Dividend payable £18k

Whats happens to the 10% ? Does this need paying to HMRC, hence I am being double taxed ?

I havn't drawn any monies on the directors loan account, or paid any dividends, only taken the optimal minimal salary so far, just trying to optimise my dividend without making an illegal dividend.

Well your first problem is that gross profit is not what you think it is.

Gross profit is profit from sales after accounting for cost of sales (i.e. it is the difference between revenue and the cost of making a product or providing a service).

Net profit is profit after all other expenses are taken into account.

Corporation tax is paid on net profit which in your case is £53206.

You can pay a dividend of anything up to the total of all net profits after tax which is £42565.

Dividend tax credits are entirely separate to the above as the tax credit relates to personal tax rather than company tax. 2 seconds on google gives you this from HMRC

Companies pay you dividends out of profits on which they have already paid - or are due to pay - tax. The tax credit takes account of this and is available to the shareholder to offset against any Income Tax that may be due on their dividend income.
When adding up your overall taxable income you need to include the sum of the dividend(s) received and the tax credit(s). This income is called your dividend income.

so in your case you are fine. However what you have done

1) got basic terms totally wrong
2) not grasped the difference between corporate and personal
3) done things in what appears to have been a tax inefficient way.
4) Demonstrated that if you have an accountant you need to reread the basics guidebook they sent you (or they didn't send you one). Nixon Williams do a decent one from memory....


If you haven't actually got an accountant point 3 emphasises that you do probably need one.

[scrollock]

Company Management #101 - Gross dividends are paid out of net profits.

I think that you need to brush up on Director's Loan rules or get an accountant; preferably both. And why no reserves? Aren't you planning on paying corporation tax (I assume yes, since you've worked out net profits) or having any bench time? Also, depending on salary taken, you may be into higher rate tax which may mean a demand for advance payment for next year, which is personal money...

re. Management rule 101, this is what is confusing me.

lets simply this a bit

Gross profit £25K

Less corporation tax, net profit £20k

I declare a gross dividend of £20k

Dividend payable £18k

Whats happens to the 10% ? Does this need paying to HMRC, hence I am being double taxed ?

I havn't drawn any monies on the directors loan account, or paid any dividends, only taken the optimal minimal salary so far, just trying to optimise my dividend without making an illegal dividend.