Payment of dividend to shareholder/director

[dpernak@hotmail.com]

We are two directors/shareholders in our own private limited company. Are there tax advantages to paying ourselves dividends instead of or as well as salaries. Is the value of the dividend linked in any way to the shareholding?

[accountant@uktaxshop]

As a Ltd co there are serious tax advantages in paying dividends.

As an employer you get hit with employers and employees NI, taking your marginal rate of tax up to around 45% for lower earners and 53% for higher earners.

Paying via a dividend will give you a lower effective tax rate of 19% (lower rate) moving 39.75% (higher rate). If your combined profits are less than £50,000 the rate is even lower.

The standard advice (assuming no other income or complications) would be to pay both directors a small salary equivalent to your personal allowance of £4615. This is then tax free.

Assuming £60k of further profit in your business between you, this would normally be distributed via a dividend. This would be taxed at the corp tax of 19%, £11,400 rather than at around £27,000 as employees.

There are a few pitfalls in doing this, particularly when it comes to pension, but with some planning there are some serious tax advantages with the dividend route.

If you would like some further help based on your circumstances, please give me a ring for a free consultation. I offer a very reasonably priced service for your tax planning, accounts preparation and annual returns.

Regards

James Smith
Chartered Accountant
www.uktaxshop.co.uk
01284 764436

[Ian McTernan CTA]

Percentage shareholding will determine who gets the dividends, eg. if you each hold 50 shares, total shares in issue 100, then if you declare a dividend of £100 per share you will each receive £5,000. Timing of the payment of dividends is crucial, as is ensuring the company has sufficient distributable reserves (basically equivalent to retained profit) to pay the dividends.

If profits are very large, vary a lot from year to year, are not easily predicted, then care should be taken before deciding on the dividend route.

Planning advice should be saught before and during each company year to ensure maximum savings and also to meet with pension requirements, etc.

Ian McTernan CTA
McTernan Associates Ltd
Chartered Tax Advisers
ian@imcternan.com