Small Business Tax Advice: Dividend Payments
Directors of small limited companies in the UK can minimize their national insurance and tax liability by paying a small salary (usually below the income tax threshold) and then paying themselves an occasional dividend from company profits. . Payment through a dividend is not subject to National Insurance Contributions (NIC) or any income tax (as long as the amount is below the highest rate threshold) because dividends are paid out of earnings. of the company after accounting and deduction of corporation tax. But because corporate tax is lower than the standard income tax rate, it is possible for a director to minimize his taxes and national insurance contributions and maximize his net income. In fact, all shareholders of a limited company can use this method to maximize their net income.
A dividend payment is simply the method by which a company can distribute the profits that are available to its shareholders and, as long as there is actually a profit to distribute, this can be done at any time the director chooses.
Even if the dividend is for an amount that takes an individual over the threshold of the highest tax rate, there may still be a benefit of being paid in part by dividend because the additional tax due is at a lower rate than if it were paid. I would have paid the full amount. paid as wages. Additionally, the payment of a dividend does not affect a director’s eligibility for personal tax-free allowance at the current rate.
However, it is wise to remember that dividends should not be used for a director to take money from the company as and when he wishes. You need to make sure that there really are enough profits in the business to pay a dividend. It is also important to recognize the difference between obtaining a dividend, which transfers the amount to the profit and loss account of the company, and paying a dividend which is a cash flow. Sometimes this can be a useful mechanism for scheduling a dividend (for example, around the end of a particular fiscal year) while waiting for clients to pay bills that will cover part or all of the dividend payment.
If the business is profitable enough then it makes sense to pay dividends on a regular basis, however please note that HMRC might consider a monthly dividend of the same amount each month as salary unless the nature of the business is consistent with an income. regular monthly. In either case, be sure to distinguish between salary and dividend payments by making separate payments (electronically or by check) and do not pay dividends through regular payments from the company’s bank account, such as direct debits. Note that reimbursement of expenses must also be paid separately from salary and dividends.
The tax law known as Section 447 on Employment-Related Securities (S447) was introduced by HMRC in 2004 to prevent companies from deliberately paying their employees and directors using stocks and dividends, rather than salary, to avoid taxes and IAS. . The S447 is typically applied to large corporations with complex compensation schemes, but its existence means that a director of a small business must be able to demonstrate that the money that goes into his personal account is a genuine dividend and not a salary.
Therefore, ensure that all relevant documentation regarding dividends is accurate and up-to-date to prevent HMRC from reclassifying dividends as salary payments and therefore incurring not only additional taxes and IAS, but also a possible fine. Do this by writing board minutes and producing a dividend voucher each time a dividend is paid and of course only pay a dividend when there is profit on the business. If you have any questions about the method you are using to pay yourself or are concerned about the accuracy of your record keeping, speak with an accountant or tax advisor to ensure that you are fully complying with the relevant tax laws.