Why are dividends good to pay?
If you are a director and shareholder of your company then the most tax efficient structure of taking monies from the company is by way of a salary and dividend mixture.
Assuming the company is outside IR35 conditions, a minimum salary and a dividend top-up is the best tax efficient structure.
Up to the 40% tax bracket, dividends are tax free from the company. Therefore, you could potentially take some £31,000 in dividends tax free (remember dividends are grossed up by 10% on your tax return).
Care is needed when taking dividends
There are a few conditions the company must adhere to when paying a dividend:
- The dividend must be declared by way of director minutes and dividend vouchers.
- Only the company's profit reserve can be taken as dividend e.g. this is the profit left over after all costs and taxes are taken into account.
- Previous year profits and losses are taken into account. This means that even if the company has made a profit in the current year but losses in previous years, the dividend may still not be legal.
Even if there is money in the company bank account, it does not mean that this money is available for the shareholders to take.
As mentioned, money must be accounted to pay vat, paye and corporation tax. You may also not have paid all trade creditors from the cash reserves either.
Therefore, before you pay out a dividends always check the financial summary on Clever Accounts as this will give you a good indication of what you can take.