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How do I pay myself through a Limited company


Now you have a limited company you will no doubt be keen to pay yourself for your efforts. There are a number of different methods for extracting money from your company that you should consider and decide upon based on your requirements and individual circumstances. This guide is intended to cover two of the most popular methods and is specific to paying yourself rather than your employees.

What are Dividends?

Dividends are basically payments made to company shareholders (not Directors)from the profits of the company after corporation tax has been calculated. If the company has not made a profit over a given period or there is no profit left after corporation tax has been calculated then it cannot pay a dividend. Dividends can be paid at anytime providing there are available distributable profits left in the company.

How are Dividends taxed?

Dividends may give rise to a personal tax liability in the way of income tax. The corporation tax liability is calculated and paid to HM Revenue and Customs at the end of the company’s financial year and takes into account the overall profit of the company. Any profits left can be taken as dividends (or so called distributions).

If a company pays a dividend that cannot be supported by its profits then it is technically insolvent and the Dividend is unlawful.

If Dividends have been paid when there were insufficient profits it is essential you seek immediate advice from your accountant. You must have a system where you are fully aware of your profits after Corporation tax before you start to take Dividends. Shareholders can become personally liable to repay unlawful dividends in certain circumstances.

We supply all our clients with quarterly financial accounts which include Profit & Loss, Balance sheet and an estimated Corporation Tax position to ensure the dividends you take can stay in your pocket.

Assuming that there is sufficient profit in the company you can continue to issue the dividend to your shareholders. The shareholders must be paid on a pro-rata basis in accordance with how many shares they hold. Once the shareholder has received his or her dividend then there may be an additional personal tax consideration depending on their annual earnings.

Annual Earnings (2008-2009 figures)
Up to the basic rate (Up to £34,800 ) 10%
Above the basic rate (Over £34,800 ) 32.5%

This means that ordinarily if you were earning under £34,800 per year you would incur a 10% tax liability on the dividend you received. However dividends carry a tax credit of 10% thus cancelling out the liability. On the other hand if you are earning over £38,400 per year then you would have an effective rate of 32.5% tax rate with a notional credit of 10% giving an effective rate of tax of 25% for Dividends exceeding £34,800

How do I issue a Dividend?

Here are the basic procedures for issuing a dividend.

  • Ensure that there are sufficient profits in the company to allow for the dividend. It is recommended that you print a balance sheet and profit and loss account for the period to remove any doubt.
  • Call a meeting of the directors to minute the decision and details of the dividend.
  • Generate a Dividend Certificate tax voucher for each shareholder. A tax voucher is a simple statement showing the company and shareholder details along with the individuals shareholding net dividend amount and tax credit.
  • Issue the dividend payments along with the tax vouchers and file the board minutes and accounts at the registered office.

It all may sound a little complicated but we as your accountants can prepare the forms for you. The important thing is you understand that you cannot pay a Dividend if you do not have enough profits after paying corporation tax.

PAYE vs Dividends

The question that many new company owners ask is should I pay myself using the PAYE system or Dividends. The answer is very much dependant on circumstances and in fact many individuals choose to use a combination of the two which is usually very tax efficient. Below are some pointers to help you decide on the right format for you and your company.

 

PROS

CONS

PAYE

Lots of free help available from the Revenue

11% NI for EE and 12.8% NI for Employers so can be expensive for smaller companies.

 

Tax and National Insurance liabilities are easy to calculate and paid at source.

Can be used only to pay employees of the company

 

PAYE allows you to utilise your personal allowance and starting rate of tax (20%) where applicable

 

 

Payroll expenses are deductible from the profit chargeable to Corporation Tax.

 

Dividends

 

No National Insurance.  

Directly reduces the equity of the company.

 

More tax efficient in most circumstances

Can only be paid from the profits after tax of the company.

 

Can be paid to individuals who are not employees of the company (They must however be shareholders).

 Must be aware of profits of company before paying Dividend

 

We will assess your company profits and advise the most Tax efficient methods which we consider will suit your needs and requirements.

Talk to us by contacting Stephanie Wade on 01621 850000 or email info@acplusuk.com or go to the enquiries page.

 

Accounting Plus UK offers a free no obligation meeting. Fixed price fees payable over 12 months.

For an immediate response call us or go to our contact page.

 

Offices at:  Office 12, The Bentalls Centre, Colchester Road, Heybridge, Maldon CM9 4GD

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