Be smart and don’t be a div!

ScotiaAccounting  |  19th August

Setting up a limited company has its pros and cons.

One of the main advantages of setting up a limited company is the shareholders can take a dividend.

A dividend is a monetary value paid to the shareholder out of the profit after tax that the company earns.

“So what?”, you may ask. “I pay myself more than enough through my salary!”

So what! Dividends are taxed at 10% as opposed to the standard 20% on a salary within the basic rate threshold. In addition to this, a dividend carries a 10% tax credit so that no further tax is due by the director until earnings exceed the 40% tax threshold.

Money

Paying yourself a dividend is a great way to save money (credit image:http://www.flickr.com/photos/9731367@N02/)

Consider yourself a director with shares (ignoring national insurance) a good rule of thumb is to pay yourself the personal allowance as a salary and then top up your salary with a monthly dividend.

Therefore, in the current tax year, your monthly wage will be £786.67 (£9,440/12 months) and whatever you decide to pay yourself a dividend on top.

Therefore due to the tax credit tax will be 0 if earnings are kept within the basic tax rate which is up to £32,010.

This great from a personal point of view but how does it affect your company?

Firstly the company must have enough profit after tax available to pay out a dividend. If the company does not have sufficient funds and a dividend is paid it is deemed an unlawful act.

The dividend is paid out of the profit reserve – the accumulated profit over the years of trading. This does not reduce the corporation tax like a salary payment. Also, there must be enough in the reserve to cover the corporation tax liability before a dividend is paid.

Pennies

Look after the pennies and the pennies will look after the pounds. Always keep on top of your finances (credit image http://www.flickr.com/photos/50393070@N00/).

Records of each dividend paid must be kept and notes to this effect must be included when submitting year end accounts to Companies House and HMRC.

This is a great way to extract money from your company in a tax efficient way. Ensuring your company is profitable and constantly planning ahead can pay dividends to both your company and you.

If you would like to discuss dividends in more detail please get in touch with us and we will be more than happy to assist.

0131 220 8234

mail@scotiaaccounting.co.uk