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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

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

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.

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

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.

UK Private Limited Company Formation – A brief guide.

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What is a private limited company?

A private limited company is a company limited by shares.  The company is run by its directors on behalf of its shareholders.  There must be at least one director and one shareholder for any new private company.  The same person can be director and shareholder.  The shares in a private company cannot be traded on a stock exchange, this is only open to public limited companies.

A limited company is a legal person, which means that it is separate from its owner’s finances.  This legal separation brings various advantages and obligations / disadvantages that you would need to consider before setting up a company for your business.

Limited company advantages

Some of the reasons business owners decide to incorporate a company include:

  • Separation of the business from the owner’s personal finances and other business interests.
  • Limitation of personal liability (limited to unpaid share capital).
  • Tax benefits (Corporation tax is currently lower than personal tax rates).
  • Greater credibility with banks, funders, suppliers and customers.

Limited company disadvantages

With the rights that a limited company enjoys come responsibilities and restrictions including:

  • Requirements for governance procedures e.g. annual meetings.
  • Annual filing obligations with Companies House and HMRC.
  • Additional cost compared to operating as a sole trader.
  • Restrictions on withdrawing money from the business (see below).
  • Company details must be presented on official documents and website (see below).

Withdrawing money from a company

Although a company is a separate legal person from its directors and shareholders there are restrictions on how money can be taken out of the business.  As a director of a company there are only three ways to take cash out of the business:

  • Salary
  • Dividends to shareholders
  • Directors’ loans

Companies must pay National Insurance at the rate applicable to salaries paid under a contract of employment.  Deductions must also be made from the gross salary for National Insurance and Income Tax.  Any salary must be paid under a contract of employment and is subject to the National Minimum Wage.  Directors are not able to invoice their own company for their personal time spent working on the company.

Dividends are paid at a rate agreed by the company for each class of share.  If a director is also a shareholder any dividend paid to shareholders will be paid to the director.  Dividends can only be paid out of retained profits (after tax).  If you want to pay dividends, you must have financial records to show that there are sufficient retained profits in the company.

Any money paid to a director that isn’t salary or a dividend must be considered a director’s loan.  Full records of directors’ loans must be kept and depending on when they are repaid there are different rules on how they are treated for tax purposes.

Business stationery

All companies are required to use their official company name with any business correspondence.  The company name must be stated on all stationery including Limited or Ltd at the end to signal that it has limited liability.

All business letters / emails, order forms websites must include the following information:

  • Place of registration               e.g. Scotland
  • Registered number                 e.g. SC433814
  • Registered office address      e.g. 4 Dolphin Road, Glasgow G41 4LE

For more information on forming a company for your business or keeping financial records please contact member of the Chartered Institute of Management Accountants using the link to The Team above.

Useful links

Companies House:
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