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The dangers of illegal dividends

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It can be illegal to pay dividends if:

1. There are insufficient retained profits to cover the dividend payments

2. Dividend payments may be illegal if the relevant paperwork has not been completed

You can download free templates from

http://www.contractorcalculator.co.uk/declaring_dividends_paperwork.aspx

HMRC are increasingly contending dividends and arguing that they are in reality earnings under the s62 ITEPA 2003 (salary sacrifice) rules and to persuade them otherwise needs proof that a set procedure for the declaration of dividends has been followed.

An example of a board minute is as follows:

Minutes of a meeting of directors of bloggs limited Held at 14 the road, london, ir3 5nl On 31 march 2005

Present: J Bloggs – Director

It was resolved that the company pay a dividend of £9,000 per £1 ordinary share on 31 March 2005 to the shareholders registered on 31 March 2005.

……………………………………
J Bloggs – Director

http://www.ir35calc.co.uk/dividend_documentation.aspx

Companies pay you dividends out of profits on which they have already paid – or are due to pay – tax. The tax credit takes account of this and is available to the shareholder to offset against any Income Tax that may be due on their ‘dividend income’.

When adding up your overall taxable income you need to include the sum of the dividend(s) received and the tax credit(s). This income is called your ‘dividend income’.

The dividend you are paid represents 90 per cent of your ‘dividend income’. The remaining 10 per cent of the dividend income is made up of the tax credit. Put another way, the tax credit represents 10 per cent of the ‘dividend income’.

Dividend tax rates 2013-14

Dividend income in relation to the basic rate or higher rate tax bands Tax rate applied after deduction of Personal Allowance and any Blind Person’s Allowance
Dividend income at or below the £32,010 basic rate tax limit 10%
Dividend income at or below the £150,000 higher rate tax limit 32.5%
Dividend income above the higher rate tax limit 37.5%

So the 10% tax credit offsets the 10% basic rate savings tax

Dividends are not subject to National Insurance.

Can you claim the tax credit if you don’t normally pay tax?

No. You can’t claim the 10 per cent tax credit, even if your taxable income is less than your Personal Allowance and you don’t pay tax. This is because Income Tax hasn’t been deducted from the dividend paid to you – you have simply been given a 10 per cent credit against any Income Tax due.

http://www.hmrc.gov.uk/taxon/uk.htm#5

Declaring dividend income on your Self Assessment tax return

If you normally complete a tax return you’ll need to show the dividend income on it. See income boxes 3 and 4 http://www.hmrc.gov.uk/forms/sa100.pdf

If you don’’t complete a tax return, but you have higher rate of tax to pay on your dividend income, you should contact HMRC.

steve@bicknells.net


2 Comments

  1. Thanks for this reminder of the rules Steve. It is interesting that there are still those tempted to take the maximum cash from a business when in need without thought of whether the dividend is legal or not.

  2. […] Pay Dividends – Generally directors will take a low directors fee and the rest of their income in Dividends […]

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