Forward thinking dividend declarations

Tax

You may not know it, but behind the scenes, Chippendale and Clark automatically maximise Dividends for Directors of limited companies. So long as profits allow us to do so.

We have been doing this for many years now, unless specifically asked by the client not to, and the reason why is simple.

As a company director it is standard procedure to declare a small salary up to the secondary national insurance threshold and then top up the income with dividends. There is a clause – you can only declare dividends from profits after tax and retained earnings (retained earnings are previous profits after tax not yet utilised).

Example
This example assumes one director with no other income

Year 1 – Profits £50,000
Year 2 – Loss £40,000


Method 1

When Chippendale and Clark complete Year 1 accounts, they would have automatically declared salary of £8,788 topped up by Dividends of £41,212, making total income for the year for the directors’ tax return £50,000, which is up to the higher rate Tax threshold (2021).

This would have been regardless of the amount withdrawn from the business, so if the director only took £20,000 cash from the company, the above would still be declared and the remaining £30,000 would be available to take later having already paid the personal Tax on.

Due to year 2’s loss, the individual would not be able to declare any further Dividends and therefore would only be entitled to the salary of £8,788. But remember, they still have the £30,000 reserves in the Directors loan account not taken in cash last year available to take.

This makes total amount available to take in cash over the two years of £58,788.


Method 2

If the initial £20,000 drawings were declared in year one as £8,788 salary and £11,212 dividends, the total income for year one would be £20,000 and declared on the personal Tax return.

In year two the loss of £40,000 supersedes the retained earnings of £38,788 and therefore the Director is restricted to only taking salary in the second year of £8,788, even if there’s cash reserves available to take more. The other option would be to increase the salary for the director in the company for the year which is costly for both Tax and National Insurance.

Assuming salary stays at £8,788, the total amount available in method 2 over the two years is £28,788, which significantly lower than method 1 and could cause cash issues for the Director.


At the end of 2019 and start of 2020 no one could have foreseen what effect Coronavirus would have had on their businesses, and many Directors are stuck having used method 2 to draw from their company as they had not pre planned for any fluctuating profits.

As a result, many company Directors have had to borrow from their own company, incurring interest charges for loans over £10,000 and a 32.5% penalty charge from HMRC for any loans over £5,000 which could have potentially been avoided if they had used method 1.


Call Chippendale and Clark today if you feel that your company requires forward thinking tax planning.

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