Salary & Dividends Part 2: How to do it

This is the second part of an article on Salary and dividends.

Read part 1 here

How to do it: Dividends

HMRC are particularly tough on this area when they are carrying out investigations of company accounts and one of the things they check is whether dividends have been properly handled in terms of the Companies Act.
What does properly handled actually mean?

1. That the Board of the company has considered the company’s financial position, not only in the previous financial year but also that paying a dividend is consistent with current trading and with business prospects. In other words, if this were a larger concern with many shareholders, would you still have taken the same decision to pay a dividend?You can manage this simply by having monthly accounts or quarterly accounts prepared that show profits arising (provided there are profits of course!) and carrying out a financial forecast once a year showing your expectations of the future.
2. That the Board has reached a properly minuted decision about dividends. This means that there will be a reasoned note of the discussions that took place when considering whether to pay a dividend or not and the basis for deciding to pay a dividend at that value. For a single shareholder/ single director company this could prove tricky, since you can hardly discuss it with yourself, argue and agree! In these circumstances you need simply keep a record of the data you examined (keep the copies), any advice you received, questions you asked of your adviser and why you decided to proceed.
3. Finally prepare the dividend voucher that reflects the amounts paid, tax credit and the profits year from which it is being paid – and a few other things – and get the payment arranged.

You need some advice if:

• You have more than 1 shareholder
• You have any shareholders who have waived their rights to dividends or want to
• Your “partner” – wife/ husband/ civil partner/ cohabitee has shares in your business and is not otherwise an active employee in the business.

So, why are two hats better than 1?

This is the simplest part of the tale. When you are both Director AND sole shareholder in a private limited company, you not only control the decisions about dividends and salary you benefit personally from a pay strategy that you determine. When there are multiple shareholders there is always the question of “Yes, I can afford to pay £x in dividends BUT if I do that, HE (or SHE) will get £y”.

But please be aware that HM revenue & Customs HATE the idea that through a combination of rules you can have this much tax free income and they are always trying to find ways to tax you more. National Insurance charged on dividends, while sounding technically impossible, is not impossible. So if you are following a plan such as is outlined above, be aware that it (the legal ability to do it) could soon come to an end.

The sun is shining, so make hay while it does, but keep an eye on the tax weather and get the right advice before it rains.

JohnF

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