Second post of the evening, sorry. I could do with some clarification regarding dividend rules.
A client has profit after tax for the year to 30 June 11 of £4k.
In June of the same year they decided to be more tax effective and pay themselves dividends and reduce their current salary. The dividends paid were £2.7k.
The dividends do not exceed the profit after tax, so that's OK, isn't it?
But I'm also not sure about the tax calculation. If PBT are £4.4k what would tax be? Is it a simple calculation of a flat percentage of the PBT? The tax figure on my client's draft accounts comes back at 5.6% of the PBT - can that be right? (I'm the bookkeeper, I did not prepare the accounts, but my client wants me to look them over and it's years since I've done any tax). And then there's the June div. I've done some reading and the way I understand it is the company pays the dividend to the shareholder net, i.e. the company witholds the tax element - I assume to pay over later on the recipients behalf. If that's the case, should that tax also be included in the tax figure shown on the accounts?
Now into the current year - y/e 30 June 2012. The client is still paying themselves about £2.7k a month dividend, but this might go up due to some argybargy between the directors. I'm slightly worried given their profits for a whole year last year were only £4.4k, that they might end up paying dividends out of profits they don't have. I suppose because they have drastically reduced their salaries, to take the dividends, this should have a postitive effect on their profit and all else being equal they would have enough. Does that sound reasonable?
Having said that, woud it still be a good idea for them to produce management accounts monthly before paying themsleves their divs, just to check the profit is there?
Very long post I know, writing it down does help clarify the situation for me, but it does make for a terribly long post. I'd really appreciate any help. Thank you
Yes it's correct for dividends to be less than the profit. Sometimes they can exceed the profit as long as they don't exceed the entire distributable reserves on the balance sheet.
Corporation Tax (at small companies rate) is 20% of the net profit, however things can change this figure such as capital allowances or losses brought forwards, so you would need to see the tax computation (which is normally attached to the copy of the CT return) to get the full picture.
It would be much better to have management accounts to refer to before making any dividend payments, but yes if the salaries have been reduced theoretically there is more profit with which to take the dividends.
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Jenny
Responses are my opinion based on the information provided. All information should be thoroughly checked before being relied on.
Yes it's a strange one, Maria. I believe the dividend tax credit is 'deemed' as having been paid within the CT bill of the company. Maybe someone will confirm this.
Companies pay 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. [HMRC]
The following might help: profit before tax: 100 tax: 20 profit after tax: 80 dividends: 80
As dvds are from taxed income and tax shouldn't be paid twice on the 'same' money - the tax credit 'withheld' is tge tax already paid or due to be paid.
