Covid-19 Measures in General

Disclaimer

This report was published, in good faith, based on the prevailing information, at 1.00pm on 23 Mar 2020. The situation is changing on a daily basis and any updates to this report will be clearly marked with a date time stamp.

1 of 3 Covid-19 Measures in General
2 of 3 Covid-19 Support For Freelancers
3 of 3 Covid-19 Bounce Back Loans

Overview

The Government measures are designed to target employees and businesses which are directly affected by the Covid-19 issue. We can argue that we are all affected, but having had dealings with HMRC for 35+ years they can be tricky, and so we suggest that you keep evidence in case you need to (at a later date) show how you have been affected. That includes:

• Medical correspondence for those worst affected.
• Employer correspondence for those laid off.
• Business correspondence for those who experience a downturn.

Do not routinely delete those emails. If somebody cancels a piece of work (or worse) please keep a copy of that email for 6 years beyond the end of your trading year (or tax year).

VAT Registered Taxpayers

VAT due for quarters ended 29 Feb 2020 through to 30 Jun 2020 inclusive will not become due until 7 Aug 2020 at the earliest. This right is automatic and (Government says) no action needs to be taken. If you have VAT to pay, you can pay it on your normal due date if you wish, or hold on to the cash and pay on 7 Aug 2020. No interest will be charged. If you are due a VAT repayment these will be processed as normal.

If you pay quarterly VAT by Direct Debit and want to delay your payments then we recommend cancelling the Direct Debit now. We know from experience (foot-and-mouth disease in 2001 and the farming sector) that “this right is automatic” may not be enough to stop HMRC Direct Debit collections.

Apparently a further announcement is to be made which will allow accumulated VAT debts to be paid over time, and you are to be given until 5 Apr 2021 to bring things up to date.

Irrespective of actual payment dates, VAT returns must still be submitted within the correct time frames.

Mainstream Businesses

Most of the best measures that have been announced are contingent on you being a mainstream business, that is to say, one which:

• has commercial premises subject to business rates; and
• is eligible for either Small Business Rate Relief or Rural Rate Relief.

In these cases you will qualify for grants of up to £10,000 (originally the announcement was £3,000). Whichever local authority deals with your business rates will be in contact you and will automatically initiate the process for you.

All Businesses

Loan scheme – talk to your bank. The Government has agreed to underwrite 80% of any loan capital advanced by your bank under these emergency measures. Theoretically that makes you a lesser risk today that you were a few weeks ago. However, nothing really changes between you and the bank, your application still needs to be well founded and your repayments need to be affordable. The protection is for the bank in case your business goes bankrupt.

Employers and Employees

The Chancellor announced a new a grant from HMRC to employers to cover furloughed workers and keep people on payroll rather than laying them off. The coronavirus job retention scheme would pay up to 80% of employees’ salary to a maximum of £2,500 a month.

The job retention scheme will be backdated to 1 March, with no limit on the amount of funding, and The Chancellor stated that it will be open initially for “at least three months” but didn’t take off the table the option to extend the scheme for longer if necessary.

HMRC will implement a process to fund employers. However, HMRC is in the business of collecting tax and has less experience of handing out grants. The infrastructure to do this is currently a work in progress. Nobody knows when the first grants will be paid.

27 Mar 2019 12.30pm Update – strike out this headingSelf Employed Trade or Partnership

27 Mar 2019 12.30pm Update – new heading – All Self Assessment Cases

Self assessment tax instalments due on 31 Jul 2020 have been postponed, without interest etc, and will now become due on 31 Jan 2021. This is automatic and no action needs to be taken.

27 Mar 2019 12.30pm Update – strike out this para – Apparently you need to be in a self employed trade or be a partner in a traditional partnership to take advantage of this. That means (until we hear otherwise) that self assessment tax instalments due on 31 Jul 2020 on account of your rental income or dividend income, etc, are still due.

Freelance Limited Company

Other than claiming the 80% job retention scheme figure (see “employers” above) there are no specific provisions for small freelance limited companies.

27 Mar 2020 12.30pm update – even the eligibility for this 80% has been questioned by some legal experts. Please see this newer blogpost.

The Government is still addressing this issue and has called for submissions to made by 5pm GMT on 23 Mar 2020.

https://twitter.com/CommonsTreasury/status/1240620040803803136

Use the email address specified in that tweet and (in meaningful words) spell out precisely what you want The Cabinet Office to help with.

Other Resources

Well respected tax lecturer Giles Mooney has posted a 17 min video on YouTube:

Although we have covered key points above, clients of Proactive may be interested in the following sections:

• 10min02 – 10min40 – statutory sick pay
• 10min41 – 11min30 – the self employed
• 14min10 – 15min25 – loan guarantee
• 15min25 – 15min59 – claiming on business insurance

The Government Support for Business page is here:

https://www.gov.uk/government/publications/guidance-to-employers-and-businesses-about-covid-19/covid-19-support-for-businesses

The Coronavirus helpline: 0300 456 3565

This telephone number has been rebranded as the Coronavirus Helpline. It’s not a new service as some claim. It has been in existence for many years and is also known as the Business Support Helpline. As far as we know, it is mainly of use to taxpayers who wanted to negotiate “time to pay” arrangements.

Director shareholder payments 2020/21

This is a basic guide to the small salary big dividend method of rewarding yourself from your own company for the tax year ended 5 Apr 2021.

Your company is responsible tor maintaining a corporation tax reserve. Dividends can only be paid from the company’s post tax profit, so that means that the company tax reserve must stay in the company.

If you have no profit then you can pay no dividends. If most of your income is from dividends then you will need a personal income tax reserve as well. Keep corporate stuff corporate and personal stuff personal. Maintain two tax reserves properly and then you’ll never get a shock when it’s tax payment time.

Follow this system precisely. Ensure bank transactions between your company bank account and your personal bank account follow this system accurately. If it’s not right then HMRC may decide that PAYE tax and National Insurance is due on all of your personal income. You definitely do not want that to happen.

For this process to be legitimate you must be a director/shareholder of a UK limited company.

Your salary is paid to you for the responsibility involved in “holding the office of director” and not for “work done”.

All shareholders must receive dividends in direct proportion to their shareholding.

Beware of adverse consequences if you decide to take 100% of the dividend when you are not the 100% shareholder.

Other than salary, describe these amounts as “drawings” until the overall tax picture for the year is clear. The “dividend” is calculated later. Separate bank transfers are required in order to distinguish salary from drawings. In most cases that means setting up 4 separate payments at end of every calendar month. As Proactive does not hold any authorities on client bank accounts, it’s up to you to make the correct transfers at the correct time.

Basic rate taxpayers

For people whose monthly income does not exceed 4,165.

Basic rate taxpayers year ended
5 Apr 2021
Monthly figures
Salary 732
Primary “Tax Free” drawings (personal allowance) 309
Secondary “Tax Free” drawings (dividend rate band) 166
Tertiary drawings (max) liable to 7.5% tax 2958

Provided always that the monthly income does not total more than 4165
Put aside 7.5% of your tertiary drawings as a personal tax reserve.

Higher rate taxpayers

For people who need (and can afford) monthly incomes between 4,165 and 8,333.

Higher rate taxpayers – 40% year ended
5 Apr 2021
Monthly figures
Salary 732
Primary “Tax Free” drawings (personal allowance) 309
Secondary “Tax Free” drawings (dividend rate band) 166
Tertiary drawings liable to 7.5% tax 2958
Supplementary drawings (max) liable to 32.5% tax 4168

Provided always that the monthly income does not total more than 8333
Put aside 7.5% of your tertiary drawings as a personal tax reserve.
Also put aside 32.5% of your supplementary drawings as a personal tax reserve.

Top rate taxpayers

For people who need (and can afford) monthly incomes in excess of 8,333.

There are graduated changes for annual incomes between 100,000 and 150,000 and the 45% rate of income tax also kicks in.

Top rate taxpayers – 45% year ended
5 Apr 2021
Monthly figures
Salary 0
Primary “Tax Free” drawings (personal allowance) 0
Secondary “Tax Free” drawings (dividend rate band) 166
Tertiary drawings liable to 7.5% tax 2958
Supplementary drawings liable to 32.5% tax 5209

Additional drawings liable to 38.1% tax excess over 8,333.00
Put aside 7.5% of your tertiary drawings as a personal tax reserve.
Also put aside 32.5% of your supplementary drawings as a personal tax reserve.
And put aside 38.1% of your additional drawings as a personal tax reserve.

Is this legal?

Yes.

Lord Tomlin stated in the case of IRC vs Duke of Westminster (1936) 19 TC 490 every man is entitled, if he can, to order his affairs so that the tax attaching under the appropriate Acts is less than it otherwise would be.

The key thing is to keep this system in “order” and in compliance with the various Taxes Acts. If you deviate from the guidance above then you may find that your tax planning is not legal.

Director shareholder payments 2019/20

If you wish to follow the small salary big dividend method of rewarding yourself from your own company, this simple guide can help.

As a matter of routine, your company should prepare its own corporation tax reserve. You will probably need to prepare a personal income tax reserve as well. A company can only pay dividends from the company’s post tax profit. If you have no profit then you can pay no dividends. Do not pay out all of the profit as dividend, only the post tax profit. That means that the company tax reserve stays in the company.

Follow this system precisely, and ensure bank transactions between your company bank account and your personal bank account follow this system accurately. If it’s not right then HMRC may decide that PAYE tax and National Insurance is due on all of your personal income. Moreover:

  • You must be a director of a UK limited company.
  • Your salary is paid to you for the responsibility involved in holding the office of director and not for “work done”.
  • You must also be a shareholder in the company.
  • All shareholders must receive dividends in direct proportion to their shareholding.
  • Beware of adverse consequences if you decide to take 100% of the dividend when you are not the 100% shareholder.

Other than salary, describe these amounts as “drawings” until the overall tax picture for the year is clear. The “dividend” is calculated later. Separate bank transfers are required in order to distinguish salary from drawings. It also makes life easier if you use separate bank transfers for primary, secondary (etc) drawings.

Basic rate taxpayers

For people whose monthly income does not exceed 4,165.

Higher rate taxpayers

For people who need (and can afford) monthly incomes between 4,165 and 8,333.

Top rate taxpayers

For people who need (and can afford) monthly incomes in excess of 8,333.

There are graduated changes for annual incomes between 100,000 and 150,000 and the 45% rate of income tax also kicks in.

Tax Planning

In all cases, and especially in relation to that last table, we can provide an accurate tax forecasting service which fine tunes the optimum level of dividend to suit your income level, your savings, marital status, child benefit position and your country. It’s a premium service detailed on our prices page.

Let us know if we can help.

Director shareholder payments 2018/19

Since the introduction of the Dividend Allowance and the Interest Allowance in 2016, compounded by the new Scottish rates of tax in 2017, there is no easy way to work out the optimum pattern of salary and dividends for directors of small UK companies.

Here’s a rough guide to what you might want to pay yourself and what sort of personal income tax reserve you may need to keep. Remember, that this is in addition to your company preparing its own corporation tax reserve. A company can only pay dividends from the company’s post tax profit. If you have no profit then you can pay no dividends.

In order to benefit from this working practice you must follow the system precisely. Failure to do so may lead to a (later) deduction of PAYE from your income and possibly a charge to interest and penalties if HMRC determine that any tax and National Insurance is being paid late.

  • You must be a director of a UK limited company.
  • Your salary is paid to you for the responsibility involved in holding the office of director and not for “work done”.
  • You must also be a shareholder in the company.
  • All shareholders must receive dividends in direct proportion to their shareholding.
  • Beware of adverse consequences if you decide to take 100% of the dividend when you are not the 100% shareholder.

Other than salary, describe these amounts as “drawings” until the overall tax picture for the year is clear and the exact “dividend” can be calculated.

Bank transfers

Separate bank transfers are required in order to distinguish salary from drawings. It also makes life easier if you use separate bank transfers for primary, secondary (etc) drawings.

Basic rate taxpayers

For people whose monthly income does not exceed 3,861.

Higher rate taxpayers

For people who need (and can afford) monthly incomes between 3,861 and 8,333.

Top rate taxpayers

For people who need (and can afford) monthly incomes in excess of 8,333.

There are graduated changes for annual incomes between 100,000 and 150,000 and the 45% rate of income tax also kicks in.

Tax Planning

In all cases, and especially in relation to that last table, we can provide an accurate tax forecasting service which fine tunes the optimum level of dividend to suit your income level, your savings, marital status, child benefit position and your country. It’s a premium service detailed on our prices page.

Let us know if we can help.

Dynamic coding for PAYE

HMRC has recently (late summer 2017) introduced a system for issuing “dynamic tax codes for PAYE cases”. It is intended, from their point of view, to be more accurate and thereby give taxpayers the most suitable code on a regular basis. Indeed it does seem to issue regular updates to coding notices (a bit too regular by some standards) and it does seem to get some things wrong! So in that respect it’s no better than the system they had before.

Every time your employer runs a payroll, and submits one of the “real time information” (RTI) reports, the Dynamic Coding system evaluates what should happen to your tax code. If the evaluation predicts a change next month, of anything more than a few pounds, then it issues a new code.

This presents no problem for people who have a salary fixed at the start of a tax year, have a salary review which coincides with the end of the tax year, and have 12 monthly payments which are near identical. No need for any changes to your tax code and Dynamic Coding does the maths and leaves everything as it was.

If that’s not you, then there are going to be one or more changes throughout the tax year. It gets particularly irritating when you get a bonus early on in the tax year, or in any month before about tax month 11 (which is February).

For example, if your salary is 36,000 then you’d have the code calculated according to monthly income of 3,000. However if it’s 36,000 with a 6,000 bonus, and that bonus is paid at the end of every April, HMRC will think that your April pay (being 9,000) is typical for the year. It scales that up to 9,000 every month, assumes an annual salary of 108,000, and works out (because you’re apparently earning more than 100,000) that you’re no longer entitled to the annual personal allowance of 11,500 and imposes a restriction. That results in enormous wodges of tax being taken off your pay in May!

How can we fix it? Accountants can’t!

In their wisdom, HMRC has decided that (a) you can only change it by logging in to your online personal tax account or (b) by calling them. That’s “you” the taxpayer, and not the accountant. HMRC has designed the system to exclude accountants and we have no access to personal tax accounts unless we’re sitting next to you when you log in!

So, you need a personal tax account (which requires two factor authentication) and that means you need a UK mobile phone. We have non resident clients who are UK taxpayers, and who do not have a UK mobile phone! HRMC’s advice to them – buy a UK mobile phone!

We know where Theresa May lives if you want to write to her!

Anyway, sign up for a personal tax account here https://www.gov.uk/personal-tax-account or phone HMRC on this number 0300 200 3300 (and expect a bit of a wait) and tell them what you think is wrong with your newly issued dynamic tax code.

By all means check with us first, and let us have a copy of your latest coding notice, because we don’t always get them for our personal tax clients. We certainly do not get them for employees of clients. When we run employer payrolls, we have coding instructions which tell us only the end result and not the constituent parts of a tax code

The HMRC Self Assessment portal which we do have access to (when personal tax clients have put in place the correct authorisation) is still separate to the PAYE system. There is some cross pollination between the Self Assessment system and the the PAYE system, but it’s 50 50 whether we get a PAYE coding notice or not. If we can see what the notice says, then (subject to no unforeseen events) we can make an intelligent guess as to what the code should be for the rest of this tax year. Or at least until next month when Dynamic Coding decides to change it again!

Making Tax Digital

“Making Tax Digital” is a new system of filing your tax data quarterly, and it will eventually replace the Self Assessment system.

In effect, you will have to file a quarterly tax return if you fall into one of these categories:

  • self employed
  • partnership
  • landlord

And having filed all four quarterly tax returns, you will also be required to complete a fifth tax return with any year end adjustments (or simply to confirm that the earlier four were correct and that there are no year end adjustments). So that’s five tax returns every year, instead of one.

“Making Tax Digital” (or MTD for short) is being rolled out from 6 Apr 2018 and is currently being tested by a sample of taxpayers in a one year trial.

The timetable is staggered and looks like this:

  • 6 Apr 2018 – landlords and any unincorporated businesses which are VAT registered (the self employed and partnerships)
  • 6 Apr 2019 – any other self employed and partnership businesses earning more than 10,000 per year.

MTD will be extended further to include limited companies, probably from 1 Apr 2020 but no definite date has been announced.

This means from 6 Apr 2018 that landlords and unincorporated businesses will be required to:

  • Maintain their records digitally, through software or apps
  • Report summary information to HMRC quarterly through their ‘digital tax accounts’
  • Make an end of year declaration through their digital tax accounts

You can set up a personal “digital tax account” now. It requires two factor authentication, so you will need a UK phone number which is capable of receiving an SMS text message each time you log in to your account. That also means that your accountant will be able to prepare records, but will not be able to submit them. They will be passed back to you for you to submit . . . five times per year!

We’d love to do it all for you, but it would be impractical for us to keep rows and rows of mobile phones and to do the logging in and the quarterly submissions! We’ve looked at using virtual mobile numbers from Nexmo and Twilio, but these services are barred from working with two factor authentication systems.

Hence, the emergence of the “Making Tax Difficult” meme!

A digital record is a record of data for each transaction of “the business”. The proposed minimum required data will be:

  • Date rentals due and payment received date if using cash basis of accounting
  • Rental value
  • Invoice date and value for expenses
  • expense category
  • deducted amount/percentage for expenses (allowing for any duality of purpose)

We already use professional software which does this, but HMRC expect all businesses and landlords to possess and to use their own software. Digital records can be maintained using software which will be available from third party software providers. HMRC have confirmed there will also be some products which are free of charge.

If these “free products” are anything like HMRC’s free payroll program then they will have limitations. For example, HMRC’s free payroll program will generate all the reports that HMRC wants, but it does not generate payslips, which is what employers and employees want!

If you rent out multiple properties there is a mix of “separate” and “joint” rules. It will be easier to keep separate records for each property, and to combine the totals in order to file a single report. You won’t need to file supporting receipts (though the original MTD plans wanted that) but you will be required (as now) to keep all your supporting receipts so that HMRC can see them if requested.

In the case of a jointly held property, each owner has a separate obligation to file their own figures – their share of each total.

In the case of an unincorporated business, operating as a partnership, a nominated partner is required to submit a full set of totals for all five returns over a year. The nominated partner is required to notify each partner at the year end, of each partners’ totals, and has an option (but not a requirement) to do that for each quarterly report.

There will be an overlap between Self Assessment and Making Tax Digital:

  • 2016/17 Self Assessment Return – due 31 Jan 2018
  • 2017/18 Self Assessment Return – due 31 Jan 2019
  • Apr, May, Jun 2018 MTD report – due 31 Jul 2018
  • Jul, Aug, Sep 2018 MTD report – due 31 Oct 2018
  • Oct, Nov, Dec 2018 MTD report – due 31 Jan 2019
  • Jan, Feb, Mar 2019 MTD report – due 30 Apr 2019
  • 2019/19 Self Assessment Return – due 31 Jan 2020

This means that your Apr, May, Jun 2018 MTD report will be due in long before your 2017/18 Self Assessment Return is due. The Apr, May, Jun 2018 figures will also appear in the 2017/18 Self Assessment Return.

We are all going to have to get used to updating our records more frequently, and to submitting returns more frequently. Will this lead to HMRC asking for more frequent tax payments? Quarterly? Currently, they say “no” but who knows how that may change?

Will it lead to more work for you and I? Yes! And what will that mean for fees? Good question.

Director shareholder payments 2017/18

Since the introduction of the Dividend Allowance and the Interest Allowance in 2016, compounded by the new Scottish rates of tax in 2017, there is no easy way to work out the optimum pattern of salary and dividends for directors of small UK companies.

Here’s a rough guide to what you might want to pay yourself and what sort of personal income tax reserve you may need to keep. Remember, that this is in addition to your company preparing its own corporation tax reserve. A company can only pay dividends from the company’s post tax profit. If you have no profit then you can pay no dividends.

In order to benefit from this working practice you must follow the system precisely. Failure to do so may lead to a (later) deduction of PAYE from your income and possibly a charge to interest and penalties if HMRC determine that any tax and National Insurance is being paid late.

  • You must be a director of a UK limited company.
  • Your salary is paid to you for the responsibility involved in holding the office of director and not for “work done”.
  • You must also be a shareholder in the company.
  • All shareholders must receive dividends in direct proportion to their shareholding.
  • Beware of adverse consequences if you decide to take 100% of the dividend when you are not the 100% shareholder.

Other than salary, describe these amounts as “drawings” until the overall tax picture for the year is clear and the exact “dividend” can be calculated.

Bank transfers

Separate bank transfers are required in order to distinguish salary from drawings. It also makes life easier if you use separate bank transfers for primary, secondary (etc) drawings.

Basic rate taxpayers

For people whose monthly income does not exceed 3,749.

Higher rate taxpayers

For people who need (and can afford) monthly incomes between 3,749 and 8,332.

Top rate taxpayers

For people who need (and can afford) monthly incomes in excess of 8,332.

There are graduated changes for annual incomes between 100,000 and 150,000 and the 45% rate of income tax also kicks in.

Tax Planning

In all cases, and especially in relation to that last table, we can provide an accurate tax forecasting service which fine tunes the optimum level of dividend to suit your income level, your savings, marital status, child benefit position and your country. It’s a premium service detailed on our prices page.

Let us know if we can help.

Can my business claim for a Christmas party?

There is no specific tax deduction for a “Christmas party” but HMRC does allow a measure of tax relief for “an annual event”.

Staff entertainment is normally treated as a “Benefit in Kind”, and directors and employees have to pay tax and national insurance on the amount of the benefit.

Here’s the one way to avoid a “Benefit in Kind”.  As a company director, you are entitled to provide an annual event for yourself, any staff you employ, and your partner, and to reclaim the costs against the company. Proved that the cost per head does not exceed £150 (including VAT) then you can claim it. If it’s one penny more then the whole amount does not qualify, so be sure to stay within the limit.

It can be any one event, or a combination of events, and it doesn’t have to relate to the Festive Break. However, you do actually have to hold an event in order to reclaim the costs against your company. You can’t simply make a cash claim for £150.

For a detailed explanation of the annual event expense rules, check the HMRC site here or get in touch with us.

Credit Notes

“I need to issue a Credit Note. What should I do?”

Never delete an invoice or amend an invoice after it has been issued. If the figures need to be changed use a Credit Note.

A credit note is simply a negative invoice. It replicates the original invoice in almost every way, though instead of the word “Invoice” it says “Credit Note”. That tells everybody that all the figures are to be recorded as negative amounts. The date on the credit note is normally the date that you prepared it, unless there are compelling reasons to use a different date.

Use the next number in your unique number sequence for credit notes. Invoices follow one number sequence, and credit notes have a separate number sequence of their own. They do not need to be inter-related but within each set the document number does need to be unique. Invoice numbers and credit note numbers must be purely numeric, purely sequential and include no letters and no punctuation. If you need to add a reference put that in a separate reference box and do not combine it with the credit note number.

As with an invoice, your credit note must be on your letterheaded paper.

In order to avoid any confusion, ensure the the words “Credit Note” are displayed boldly at the top of the document.

When your bookkeeping is done, and when your customer does their bookkeeping, the original invoice and the subsequent credit note will cancel each other out.

We will know what is happening, but only if you follow the system.

 

Director shareholder payments 2016/17

In the good old days there was an easy way to work out the optimum pattern of salary and dividends for directors of small UK companies. With the advent of the Finance Bill 2016 the situation has become hopelessly complex and that prompted AccountingWeb to publish a critical blogpost. Here’s the first bit with the all important table:

201604081128accountingweb001

If you want to see the blogpost in full you’ll have to sign up for membership of AccountingWeb. It’s a free resouce for accountants!

And, as we said in our 30 Nov 2015 blogpost, in 2016/17 we are going to have to get used to new tax bills on dividends which have not been around for donkeys years.

Back to the question of “optimum”

All things being equal (and they are probably not equal this year) we have set out below a standardised process for trying to maintain the established working practice of giving yourself a tax efficient combination of small salary and big dividend. In order to benefit from this working practice you must follow the system precisely. Failure to do so may lead to the imposition of a deduction of PAYE from your income and possibly a charge to interest and penalties if HMRC determine that any taxes are being paid late.

You must be a director of a UK limited company to do this. Your salary is paid to you for the responsibility involved in holding the office of director and not for “work done”. You must also be a shareholder in the company in order to receive dividends. It follows that all shareholders shall receive dividends in direct proportion to their shareholding. Where you are the sole shareholder and have 100% of the shares, that’s relatively straightforward. Beware of adverse consequences if you decide to take 100% of the dividend when you are not the 100% shareholder.

The company may only pay dividends if it has a profit. If you are paying yourself sums of money out of investor funding or the corporation tax reserve or the VAT reserve (and not out of profit) then you are borrowing from your own company. This is a bad thing! HMRC may impose financial penalties on you for doing this – twice. There is one penalty for the company and a separate penalty for each overdrawn director.

Hold a monthly or quarterly meeting of the shareholders and decide what dividend can be paid. Prepare minutes of that meeting.

You need to know what the profits are, what the corporation tax bill is likely to be, and what is left over to distribute to the shareholders. Dividends are paid out of post tax profits, so you must ensure that the company has an adequate tax reserve. To allow for some flexibility you may choose to describe these amounts as “drawings” until the exact “dividend” is calculated.

Dividends are personal income and are subject to income tax in your hands. The pattern is different for different levels of income. Dividends no longer have a notional tax credit, what you get is what you’re taxed on and (unlike prior years) there is no reduction in your tax bill for notional tax credits.

Bank transfers

Separate bank transfers are required in order to distinguish salary from drawings (lest HMRC allege that it’s all salary). It makes life easier if you use separate bank transfers for primary, secondary (etc) drawings as well.

Basic rate taxpayers

For people whose monthly income does not exceed 3,582.

201604081246rates001v2

Higher rate taxpayers

For people who need (and can afford) monthly incomes between 3,582 and 8,332.

201604081246rates002v2

Top rate taxpayers

For people who need (and can afford) monthly incomes in excess of 8,332.

There are graduated changes for annual incomes between 100,000 and 150,00 and the 45% rate of income tax also kicks in. The personal allowance is also withdrawn after your annual income exceeds 100,000 and so if you fit this picture, this final table is for you.

201604081246rates003

Tax Planning

In all cases, and especially in relation to that last table, we can provide an accurate tax forecasting service which fine tunes the optimum level of dividend to suit your income level, your savings, marital status, child benefit position and (for residents in Wales and Scotland) your country. It’s a premium service detailed on our prices page.

Let us know if we can help.