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Tax implications & timing of a dividend

Dividend income tax ; timing of dividends

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Hi

Prospective Ltd Co client owner / director has asked if she can do following :

"Can you check/verify tax situation on any dividend we would propose/pay from the Company 

Proposed dividend of £25k per shareholder

For current tax year (2021/22)-My understaning is  each individual would have an annual allowance of £2,000 then pay 7.5% on remaining £23,000 if their individual gross annual income fell in to the basic tax bracket (shareholder directors paid £21k pa each ; one of directors owns one of the regional offices personally and rents to Co for £6k pa)

Ie.                                                       £25,000

Allow                                                  £  2,000

Taxable                                              £23,000               @7.5%  = £1,725

Net receipt per shareholder       £23,275

Additional cost to company in Corporation Tax per shareholder = 19% of £25,000  = £4,750

Overall cost to company per shareholder  = £29,750

They have said that they had a shareholder's / Directors meeting pre 31.3.21 (Co YE) and voted the above dividend through but have not paid yet.On that basis if the Co were to pay these dividends before 31.12.21 - would this be within the financial year 20/21 and tax year 20/21 and the director's and Co would have to account for the income tax & corporation tax in 20/21 , with the director's paying any additional tax in their SA return by 31.1.22 and Co paying corporation tax by 1.1.22 ?

Is above correct ?

Would there be any pros or cons having the dividends in one year or the other (ie 20/21 or 21/22) other than pushing the corporation tax liability & income tax liability to a year later if were in current year (21/22). Also, 2 of the directors have children under 16 : would above have any implications on the child benefit higher income tax  charge ?

Replies (8)

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By johngroganjga
10th Sep 2021 13:20

You need to straighten out your client’s thinking a bit. Adding 19% corporation tax to the dividend as you do in your calculations above is complete nonsense. The necessity for the company to pay income tax is a result of it having made profits. It pays the same corporation tax whether or not it pays any dividends.

To answer the question about when the dividend voted before 31.3.21 is taxable you need to see what the resolution allegedly passed said about when it was to be paid.

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Replying to johngroganjga:
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By David P
10th Sep 2021 14:11

Thanks for reply John. Noted re CT. These are clients calcs not mine. My gut feeling re the resolution is advise to deal in the current tax year, then there is no issues re post dating etc...
Main checkpoint was to ensure all shareholder directors would only pay the 7.5% on a £25k dividend (on basis they did not breach the basic rate tax threshold for 21/22)?

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By alialdabawi
10th Sep 2021 13:33

1 - Net receipt per shareholder is a meaningless phrase - dividends aren't taxed at source. They need to be paid in full to the shareholder(s) who then pay(s) income tax
2 - Dividends 'could' be taxed at source, if the company knows what tax rate to apply and also then pays the tax withheld over to HMRC using the correct references for each individual taxpayer - perhaps easier to do correctly for owner managed companies(?). It can be done but comes with it's own can of worms.
3 - Are the shareholder directors paid £25k each or £21k each? Or for that matter £23.275k each?
4 - Corporation tax rates are not applied to dividends paid/payable!
5 - Corporation tax does not become payable when a dividend is paid/becomes payable!
6 - Have not attempted to follow your paragraph on dates of events but am confident they aren't correct on the basis that you believe that corp tax becomes payable on the declaring of dividends
7 - High income charge - depends on overall picture of personal income and not solely on the (21k/23.275k/25k/6k) incomes mentioned, therefore unable to know the impact of above on the charge. But you have mentioned that gross annual income is all basic bracket, so perhaps you already have the answer

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Replying to alialdabawi:
RLI
By lionofludesch
10th Sep 2021 14:22

alialdabawi wrote:

1 - Net receipt per shareholder is a meaningless phrase - dividends aren't taxed at source. They need to be paid in full to the shareholder(s) who then pay(s) income tax
2 - Dividends 'could' be taxed at source, if the company knows what tax rate to apply and also then pays the tax withheld over to HMRC using the correct references for each individual taxpayer - perhaps easier to do correctly for owner managed companies(?). It can be done but comes with it's own can of worms.
3 - Are the shareholder directors paid £25k each or £21k each? Or for that matter £23.275k each?
4 - Corporation tax rates are not applied to dividends paid/payable!
5 - Corporation tax does not become payable when a dividend is paid/becomes payable!
6 - Have not attempted to follow your paragraph on dates of events but am confident they aren't correct on the basis that you believe that corp tax becomes payable on the declaring of dividends
7 - High income charge - depends on overall picture of personal income and not solely on the (21k/23.275k/25k/6k) incomes mentioned, therefore unable to know the impact of above on the charge. But you have mentioned that gross annual income is all basic bracket, so perhaps you already have the answer

Very comprehensive.

Thanks (2)
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By Leywood
10th Sep 2021 13:57

Prospective client?

Let the work go to someone who knows what they are doing.

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Replying to Leywood:
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By David P
10th Sep 2021 18:05

Thanks for your insightful reply

Thanks (0)
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By David Ex
10th Sep 2021 14:09

David P wrote:

Prospective Ltd Co client owner / director has asked if she can do following :

"Can you check/verify tax situation on any dividend we would propose/pay from the Company 

I assume you aren’t going to be offering any tax advice until the “prospect” is signed up and you’ve completed all your MLR formalities.

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By Matrix
10th Sep 2021 14:27

Based only on the info provided, total income is £52k for that shareholder so the basic rate threshold is breached.

Corporation tax is a sunk cost and anyway is £25,000/(100%-19%).

If I took on this client I would see if the dividend had been credited to a Director loan account in the prior tax year or not. However is this their only question or are they asking for the full suite of accounting services?

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