Dividends and personal tax

[fireblade]

My wife and myself hold equal shares in our limited company and have paid ourselves the PA for the last financial year to minimise tax. We have made profits of just under 10,000 pounds and believe there is no corporation tax to pay. Am i right in saying we can split the profits and pay us both an equal dividend with NO further personal tax liability. Sounds too good to be true to me ?

[Simon Sweetman]

Assuming that you are not higher rate taxpayers, then you pay no extra tax on the dividend. However the company will then pay non-corporate dividend rate on its £10,000 of profit, so 19%.

[deanshepherd]

If you delay paying a dividend until 1st April then you may avoid the 19% tax on the dividend altogether.


Dean Shepherd
dean.shepherd@mmi-online.co.uk
MMI Accountancy
www.mmi-online.co.uk

[fireblade]

Thanks for your feedback guys. 2 further questions if you do not mind.If I pay the 1900 pounds Corporate tax then can we just share the remaining 8100 pounds as dividends and just declare it on our self assesment forms without further tax ?

I could delay the dividend until April 1st as suggested by Dean. How would I escape the 19% tax by doing this ?

Thanks again

[deanshepherd]

Question 1: Yes.

Question 2: The reason the 19% tax arises is because of the Non-Corporate Distribution rules that were introduced to combat tax avoidance by small companies.

From 1st April, the rules *should* be changing whereby the 0% corporation tax band is scrapped along with the NCD tax rate of 19% on dividends.

Therefore, if you do not pay the dividend until then, you will avoid the tax charge.

This rule change is to be confirmed in the forthcoming budget.


Dean Shepherd
dean.shepherd@mmi-online.co.uk
MMI Accountancy
www.mmi-online.co.uk

[sharpener]

PMFJI but I thought the NCD rules were introduced specifically to stop people taking advantage of the 0% on the first 10k profits (what did they suppose would happen?).

Now the 10k nil band is to be abolished surely dividends are once again payable out of profits taxed at 19%.

Best of all if you can afford to wait, leave the profits in the business and take them out eventually as a capital gain on the shares on striking-off the company.

[deanshepherd]

If dividend was paid prior to 1st April then profits prior to 1st April would be taxed at 19% under the NCD rules.

Delaying the dividend means those profits are taxed at 0% instead (well, less than 19% anyway).

Profits made after 1st April will be taxed in any case, as you correctly state, but it is not 'those ' profits that we are saving tax on.

As for leaving the profits in the business until we close the company down - wouldn't that be a wonderful possibility! However, for most people, the mortgage still has to be paid in the meantime!