Dividend Tax – What you should know
Sometimes when advice and guidance is given, you hear it, but don’t fully take on board the cash impact on you personally. No matter how many blogs, websites or Accountants Updates you read, relating to Dividend tax, if you don’t understand the cash flow impact of how this tax is collected, you could get a nasty surprise in January.
So here’s a simplified summary for 2016/17 tax year;
- You pay tax on dividends over £5000.
- This is a new tax from April 2016.
- You can only pay dividends if your company makes a profit AFTER corporation tax is accounted for, and there is profit left to distribute as dividends.
- To pay a dividend when the above doesn’t apply, is called an illegal dividend – Don’t ever to this, avoid at all costs, the repercussions go on for many years.
- The shareholder, who receives the dividends, pays the tax and you pay it through a Self-Assessment Tax Return every tax year.
- Dividend Tax rates vary depending on how much you pay as dividends.
- You pay Self-Assessment Tax by 31 January and then have to pay 50% MORE TAX as a payment on account for the tax year coming – paid by 31 July… Ouch
- So cash flow wise, you need to plan to pay HMRC the dividend tax in January and July each year. Your self-assessment tax burden has gone up.
Other things to consider are that you must usually pay dividends to all shareholders, assuming they all have equal rights.
To pay a dividend, there is a procedure you need to have in place. You must;
- hold a directors’ meeting to declare the dividend
- keep minutes of the meeting, even if you’re the only director
- Issue the Dividend Voucher to the shareholder, which they keep for their personal tax records, such as their SA Tax return.
- It doesn’t matter where you hold your directors’ meeting – the kitchen table is fine, but formality and business process will help you understand how to run your company properly, and the routine will avoid any comeback from other shareholders, should anything go wrong in the future.
For each dividend payment the company makes, you must create a dividend voucher showing the:
- The date
- Then company name
- The names of the shareholders being paid a dividend
- The amount of the dividend
You must give a copy of the voucher to recipients of the dividend and keep a copy for your company’s records. There are on-line templates for dividend vouchers and some accounting software like Xero can create a dividend voucher.
You can find more guidance on running your company here
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For more information about Dividend Tax or how to run your Directors Meeting call us on 01603 516304.