With a cut in dividend allowance coming in April 2018 and the end of 2017/18 fast approaching it is important to review how you extract profits from your business.
For 2018/19, the dividend allowance is falling from £5,000 to just £2,000. Above the allowance the dividend tax rates are 7.5%, 32.5% and 38.1%, depending on whether the dividends fall into the basic, higher or additional rates respectively.
The fall in the corporation tax rate to 19% from April 2017, and the scheduled further drop to 17% scheduled for 2020, will help offset the reduced allowance slightly. In addition, because of the way the dividend allowance uses up the tax bands, individuals who take a small salary topped up with dividends will be able to apply more basic rate band to the excess dividends than previously.
Interim dividends must be declared at a board meeting and before this declaration, a review of the company’s finances must be carried out to establish that the dividend can be met out of profits. A decision to declare an interim dividend must be recorded in minutes at the time of declaration.
As far as HMRC is concerned, an interim dividend is paid when the director can use it. Problems can arise when you choose not to do this namely HMRC seeking to reclassify these payments as for instance employment income or the possibility that the dividends are required to be repaid.
- Directors need a paper trail proving proper regard to company profitability. Printing out a trial balance as evidence makes a good start.
- Ensure dividends are be paid or credited to directors’ loan accounts at the time, not retrospectively when it is time to complete the tax return!
Distributions made when there are not sufficient distributable profits within the company could result in directors could be made personally liable to repay the dividends.
HMRC has become increasingly concerned about companies and directors failing to pay taxes due to insolvency. HMRC can raise tax bills on directors of failed companies or require dividends to be repaid where there was insufficient profit.
In the past, limited companies may have been careless with their procedures in declaring and paying dividends but it has become increasingly important to ensure accurate and timely records are kept and not put together retrospectively at the end of the year.
HMRC is using digital technology to check company records and discrepancies can easily be spotted.
Once digital submission of VAT records for Making Tax Digital is underway from April 2019, HMRC will have more than time records to go on. There will be access to real time information about your clients’ businesses direct from the accounting records, so there will be a time-stamped digital footprint for almost all entries.
Final dividends should be declared at the annual general meeting. Once a payment date has been declared, HMRC considers the dividend to be part of the income of the director shareholders from the date and that they have a legal right to them.
Dividends can be declared but paid later. This means you can maximise the cash-flow advantage with scope to delay payment.
Plan ahead now for tax efficient 2018/19 remuneration packages. Consider charging interest on sums lent by directors, or charging rent for property owned by a director and used by the company.
It is advisable to make full use of benefits in kind, trivial benefits and pension exemptions and to be aware of the impact of National Insurance. National Insurance contributions are only due on earned income, not on rent, interest, or dividends meaning there are potential savings to be had.
Managing the rate
If your income fluctuates, you could consider leaving profits in the company to be taxed at 19% rather than face high income tax rates on dividend withdrawals. Avoid large profit extraction one year followed by small profit extraction in the next and look to average.