With current global economic situations presenting many challenges for businesses and business owners it is important to remember the Dos and Don’ts of Dividends.
Read our latest blog and advice on how best to pay yourself in the pandemic if you are not operating in profit.
Are you paying an illegal dividend?
If you are a director and shareholder of a limited company and for tax planning reasons have decided with your accountant that you would take a small salary topped up by dividends then ensure you’re not paying an ‘illegal dividend’.
I know ‘illegal’ sounds big and scary but don’t worry you’re not going to end up in jail for this but you could end up with a hefty tax bill if you don’t follow the guidance.
It is completely legit and normal for a business director or shareholder to receive a small salary and then take dividend to effectively ‘top up’ pay. However, dividends are paid out of profits of the company so if there are no profits in a company, a dividend should not be paid.
Many accountants don’t explain this to business owners. It is something that is done for tax purposes without much education. All fine and well when a business is operating in profit but what happens when businesses find themselves in a position like…oh let’s think now.. maybe a pandemic?! In cases like we are experiencing right now in COVID-19 world, some businesses have had no choice but to close their doors. For some businesses that means that while no money comes in, expenses still need to be paid and the profits dwindle.
It is still possible to pay your shareholders through this period with a dividend payment provided the profits are available to do so, if they’re not, it is classed as an ‘illegal’ dividend. HMRC may class this illegal dividend as salary on which national insurance and tax will be due resulting in a hefty tax bill!
Every business is different and the way your business was set up, trades and moves through the pandemic will be unique to you. How your business responds in terms of paying directors and shareholders will be set around existing HMRC rules and also new initiatives that have been brought in by the government. It is difficult to ‘prescribe’ a one size fits all business advice model on this topic but some points to remember include;
- If you are furloughed, you should be receiving 80% of your PAYE wage, not 80% of the amount you usually receive each month (topped up with dividend payments)
- You can work with your accountant or payroll specialist and increase your baseline salary around this time. That will mean you are taxed at source through PAYE on a higher wage, rather than taking illegal dividend payments through this period
- Each case is dependent on may factors including how many years your business has been profitable
Your accountant should be working with you to ensure you are currently remunerating your directors and shareholders in the best way possible in the current circumstances. However if you are unsure of the best way to pay at this time and need some guidance and support on the best route forwards, get in touch to arrange a chat in confidence.
Helen Crapper is the founder of Insight Finance Solutions. Helen and the team specialise in accountancy advice at every stage of business and help make finances stress free for clients. Helen is also a coach and uses money mindset coaching to help business people remove their personal blocks and limiting beliefs to grow as people while growing their businesses.
To have a chat about your business finances and how Insight Finance Solutions can help you, get in touch.