Tips, Tricks and millnews
Do you take more dividends than profit?
If you run your own company you may wish to extract as much income as possible from the company in the form of dividends, rather than as salary, as the dividend route can reduce both your own and the company’s NIC charges. However in order to pay a legal dividend the company first needs to make some profits.
Profits are generally not the same as the amount of spare cash in the
company. The profit of the company is comprised of all of the income less
the cost of supplies, plus a deduction for all other expenses which are due,
but have not actually been paid as the payment date is in the future. These
accrued expenses can include corporation tax (due once a year), PAYE and
NIC (due quarterly or monthly), rent, rates and insurance. Where the income
of the company is volatile, it is difficult to judge how much profit has been made from month
to month without drawing up some form of accounts.
When you pay yourself a monthly dividend company law requires you to check that your company has made enough profit in the year to date to cover the amount of dividend. Any losses made in an earlier year must also be covered. If the Revenue examine your accounting records they may conclude that you did not make a profit in say the first half of the year, so the dividends taken in that period were invalid and do not count as dividends at all.
If the payment to you is not a dividend it will be treated as a loan. This can be expensive in tax terms for both you and the company. An interest free loan of over £5,000 made to a director of a small company will be a taxable as benefit in kind, and the company will have to pay tax of 25% of the amount of the loan if it remains outstanding for more than nine months after the end of the accounting year.
A solution is to declare a large dividend when the profits for the year are accurately calculated, then draw out the total dividend gradually in monthly instalments. The company can pay you interest on the undrawn amounts of dividend until those funds are paid into your private bank account.
Alternatively ask us to help calculate your profits during your company’s accounting period,
so you can pay yourself an interim dividend before the accounts for the full year are finalised.
Tax return deadline to change
New tax return submission deadlines will come
into force in 2008. Personal tax returns issued
for 2007/08 in April 2008 will have to be
returned to the Revenue by 31 October 2008, if
completed on paper and by 31 January 2009, if
filed by Internet. Tax returns submitted later will
generate fines, but the dates for paying the tax
due will remain at 31 January and 31 July.
As an encouragement to submit tax returns earlier, the period during which the Revenue can question a return will be reduced. From 2008 the Revenue will have just one year from the date the return is submitted to raise any questions. At present the Revenue have a year from 31 January (the final deadline) to start enquiries. So people who submit their tax returns early currently give the Revenue longer to open an enquiry.
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