Directors Dividends

camille

I have been asked to help with the following situation, but I know that I am not competent enough to give the correct advice, but for my own learning can you enlighten me on the following:

Can you explain to me how the director’s dividends would be dealt with?

Company Net profit: £14,799.00

The director’s salary was £6,000 and her dividends have amounted to £10,000.

When/how would this be accounted for? Is it within the CT600, abbreviated accounts or self assessment and would the director pay tax on the dividends? Please help!!

AK002

Company would pay tax on the profit via CT600 and director would pay tax on the divis via Personal TRs..

camille

Hi, thank you for that…so would the CT600 profit be reduced by the dividend amount and then declared on the self assessment? Or am I still not understanding it correctly?

Anne Boleyn

Dividends

Hi Camille

The company is liable for tax on it's profits. ie T/O minus allowable expenses (including director's salary) multiplied by CT rate. These figures are put on the CT600 and filed with HMRC. This can be very simple or incredibly complex depending on the type and size of company.

The director(s) are liable for tax on their salaries and dividends (depending on the size). These figures are put on the director's tax return and the tax liability calculated accordingly.

If you would like more information then please pm me.

SarahS

Dividends

The dividends would be declared on the Director's self assessment tax return - they are paid out of company profits AFTER corporation tax.

Also, there is a 10% tax credit on dividends. It's a notional credit only and used for working out taxes. You only pay extra personal tax if your total income is over the higher rate threshold. On £37,400 there would be no additional tax to pay.

HTH

Sarah

camille

Thank you for responding to my post, I am very grateful, as I have been trying to figure this out for ages.

The net profit was £14,799, which included the director’s salary of £6000. The dividends of £10,000 would this be included with the abbreviated accounts, or just on the self assessment?

I'm thinking that the salary is taxed at the rate of 20% after personal allowance and the dividends would also be taxed at 20% as it would still be under the threshold?

At the moment I'm thinking the figures would be:

Abbreviated Accounts Net profit: £14,799
CT600 profit £4,799
Self Assessment Income £16,000


Please help!!

qwerty

Hi Camille

You are dealing with different matters - company accounts, company tax and shareholders' personal tax.

Company accounts:
The net profit you mention of £14,799 - I assume this is profit before tax? If so, the profit and loss account would then need to include a Corporation Tax Provision to then arrive at a profit after tax.
The dividends would be shown in the note reconciling movements in shareholders funds (as a reduction in those funds).
As a note, Abbreviated accounts are just a balance sheet and related notes, so no profit would be shown in Abbreviated accounts.

Company tax:
The starting point for the Company's Corporation Tax Liability will be the profit per the accounts (£14,799). This would then need to be adjusted for items such as depreciation etc. and then any claims for capital allowances can be made. This tax adjusted profit figure is what is included on the CT600.
Dividends are ignored for the CT600 (assuming sufficient distributable reserves).

Personal tax:
For personal tax, the director/shareholder would have employment income of £6,000.
The net dividend of £10,000 is actually a gross dividend of £11,111 (as a 10% notional tax credit is received). Dividends do not have a 20% rate, they are 10% up to the basic rate threshold and 32.5% in the higher rate bracket.
Assuming this is the director/shareholder's only income, he would not have an income tax liability, as the 10% tax due on the gross dividend would be covered by the 10% notional tax credit.

Sorry for the long post, but I just wanted to point out that each of the matters should be dealt with separately.

Tom

Anne Boleyn

Company accounts

Hi Camille

You've mentioned abbreviated accounts a couple of times and you may be thinking this is all that needs to be prepared. You need to file full statutory accounts, tax computation and CT600 with HMRC and abbreviated accounts with companies house. Obviously the directors each get a copy of the full accounts aswell.

As I see it your case is like this for example:

Turnover £50,000
Expenditure
director salary 6,000
office costs 1,000
other exp 28,201


Net profit before tax 14,799

Corporation tax (21%) 3,107.79

Net profit after tax 11,691.21


Dividends are on the balance sheet and so don't affect the p&l.

Dividends carry a notional 10% tax so if dividends actually received equal £10,000 then dividends issued were £11,111.11 and it is this figure that would be declared as dividend on the personal tax return of the director with a tax paid figure of £1,111.11. Thus giving £10,000 net dividend received.

Dividends are not taxed at 20% but at 10% and 32.5%.

The above is given in the honest hope that it is for your own training and that you are not advising a client. Whilst I do agree that everyone has to start somewhere I don't think that you can really start with companies without proper instruction and guidance as there are so many complications. It also wouldn't be fair to the client.

camille

Thank you very much Anne, I tend to deal with self employed clients and leave the Ltd companies to the accountants. I was actually desperate to find out for myself what is involved in doing the ltd accounts. I did refer this client over to the accountant because I was aware that I was not yet ready to do them. Thank you very much for the help. My head can stop spinning now..
Camille