Dividends and Company Tax

Chris, It sounds to me as if you will have a heavily overdrawn "directors loan" account if you have been taking every penny out of the company in this manner. The IR may seek to see this as a disguised salary and tax you rather heavily (employers NI of 12.8% is payable on top of the 41% employee’s taxation) as a result so this is really not something to mess about with yourself. I know I am biased but you certainly need some proper professional advice to get you out of this situation as this can get very expensive for you if you keep on in this manner. You may be able to declare some of these transactions as a dividend but this cannot be done if you have insufficient "reserves" in which to do so, and shouldn’t be declared retrospectively. (although in practice this may be the case). In layman’s terms if you don’t have enough cash in the bank to pay your corporation tax and bill (19% of your profit) you probably don’t have sufficient reserves to pay a dividend. (Please note this is a very simplified statement) The solution is (probably) along the lines of paying a market rate of interest on the overdrawn loan account, as reduced by some large dividend payments, and then paying back some money into the company if you hvae the cash available. Its hard to say as this sort of situation can get complex when money has been withdrawn from the company in this manner and needs to be looked at in detail. In answer to your specific questions: • Will the money I have been transferring out each month be considered as dividends for tax purposes ? Not by default, they are something that need to be declared formally. As above you probably have insufficient funds with which to declare them if you have no money back for your tax bill etc. • If so, is it true that whereas money left in the company account attracts 19% tax, the dividends will attract 40% as I am a higher rate tax payer ? No. Profits of the company are tax at 19% regardless of what you do with them. Dividends for a higher rate tax payer are taxed at 32.5% after the application of a 10% tax credit which gives and effective rate of tax of just under 40% after corporation tax and income tax. I wont do the math as it gets complicated. • I have taken out about £120k in this way – is it possible to borrow this money short term to put back into the company account for the year end ? • How will the tax man view this – is it ethical ? Its fine. • Where would you recommend I go to arrange such a loan ? You can lend the company money at any time - its when the company lends you money you run into problems. It doesn’t need anything formally drawn up your accountant cant help you with. If you need some help then please let me know, although I am as you may expect I am rather tied up with last minute tax returns at the moment and will be until the 31st Jan deadline although I dont mind taking an email or two if required. Regards,
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James Smith
Chartered Accountant
www.jamesesmith.co.uk
01235 536 773

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