If you operate your business through a personal or family company and extract profits in the form of dividends, it is prudent to review your dividend policy to determine whether it would be beneficial to pay a further dividend before the end of the 2021/22 tax year on 5 April 2022. It should be remembered, however, that dividends can only be paid if you have sufficient retained profits, and where shares of the particular class in respect of which a dividend is being declared are held by more than one shareholder, in proportion to shareholdings. Paying a dividend before the end of the tax year ..read more

A shareholder/ director is permitted to withdraw monies from the company’s bank account as salary, bonus or dividend (or possibly a loan'). However, there are set rules that need followed with regard to dividends and it is easy to fall into a 'trap' if those rules are not followed.   Trap 1 - Timing The payment date of a dividend is important. If the director has withdrawn funds resulting in an overdrawn directors’ loan account at the end of the year, dividends (or other payments /deposits) may need to be declared to clear the overdrawn account. The relevant date for an interim dividend ..read more

As we approach April 2022, a number of changes announced in the Chancellor’s latest Budget come into effect. Whilst the Budget provided some security for businesses, like scrapping plans to reduce the Annual Investment Allowance back down to £250,000, it also introduced some, let’s not so great, changes.   NIC increase - 1.25% The National Insurance Contributions (NIC) rate is set to increase by 1.25% for employees, employers and the self-employed to support the NHS, health and social care.   Up to 31 March 2022 From 1 April 2022 Employers’ NIC 13.8% 15.05% Employe ..read more

The announcements by the Prime Minister of a 1.25% rise in National Insurance Contributions (NICs) from 6 April 2022 were not totally unexpected but it seems that the increase is wider than it first appeared. We have summarised below the key points: NIC  NICs - a 1.25% rise  in primary and secondary class 1 NIC (ie employers and employees) and class 4 NICs (self employed) from 6 April 2022 for one year only NICs - a 1.25% rise in Class 1A and Class 1B NIC rates. These apply to certain Benefits in Kind (BIK) and PAYE Settlement Agreements. From 6 April 2022 this will make the rate 15 ..read more

For personal and family companies, a tax efficient strategy for extracting profits is to take a small salary and to extract any further funds needed outside the company in the form of dividends. However, while there are no restrictions on taking a salary if the company is making a loss, the same is not true of dividends. Need for retained profits Dividends can only be paid out of retained profits (i.e. profits left in the business after corporation tax has been paid). However, if a company make a loss for a particular year, this does not necessarily preclude the payment of a dividend, as long ..read more

Dividends can only be declared out of a company’s available undistributed profits, and if the payments are to be legal then the correct administrative procedures need to be followed. If a director sanctions illegal dividend payments, there can be significant tax for both the individual concerned and the company even if the director was unaware of the non validity of the dividend at the time. Just because the company's bank account is in credit does not necessarily mean that sufficient profit has been made to cover the dividend payment and it is the amount of 'retained profit' that needs to be ..read more

Dividends are paid at the same rate for each category of share according to the number of shares held. However, such inflexibility could mean the distribution of profits not being made in the most tax efficient manner or produce difficulties for a shareholder who does not want or need the payment -- a dividend waiver may offer the solution. Tax inefficiency Examples of tax inefficiency can arise where one of the shareholders is a higher rate taxpayer and the others are either basic rate taxpayers or non-taxpayers or if by taking the dividend the shareholder is affected by the higher income ch ..read more

A popular profit extraction strategy for shareholders in personal and family companies is to pay a small salary and to extract further profits as dividends. The optimal salary will depend on whether the employment allowance is available to shelter any employer’s National Insurance liability that may arise. Preserving pension entitlement One of the main advantages of paying a small salary is to ensure that the year remains a qualifying year for state pension and contributory benefit purposes. To qualify for a full state pension on retirement, an individual needs 35 qualifying years.  For ..read more

Changed business conditions in light of the Coronavirus pandemic have caused many companies to review their dividend policies not least because the company's financial position may have deteriorated significantly from that shown in its last annual accounts. The Companies Act 2006 requires that a dividend be paid only if there are sufficient distributable profits. Even if the bank account is in credit the company will need to have sufficient retained profits to cover the dividend at the date of payment. ‘Profit’ in this instance is defined as being ‘accumulated realised profits’.  If a ..read more

All taxpayers, regardless of the rate at which they pay tax, are entitled to a tax-free allowance for dividends. For 2020/21 this is set at £2,000, so if you’re thinking of branching out to be self-employed or have made the switch last year, this is what you need to consider. Nature of the allowance If you’re self-employed and own your limited company, you can take money out of your company as a dividend, or you may receive a dividend payment if you own company shares. Although termed the ‘dividend allowance’ it is in fact a zero rate band. Dividends covered by the allowance are taxed at a ..read more