NEWS - PROFIT EXTRACTION - 13.04.2006

Time to increase dividends?

Dividend only

Recap. First, there’s no tax on dividends. Second, there’s no tax if they are within the taxpayer’s lower/basic rate band which is taxed at 10% and fully offset by the tax credit of 10% that comes with the dividend.

Example. Rita is the 100% owner of Meter Maid Ltd. During the year to April 5, 2007, she could receive a dividend of, say, £34,502 without any further tax liability as follows:

(*) The dividend tax credit which can be offset is restricted to 10% of the taxable dividend.

Dividends and salary

Nominal salary. Rita could be paid a commensurate wage or salary for just her administrative or secretarial duties. Even though they are only part of her responsibilities they can be paid at least £5.05 per hour (since October 1, 2005) under the minimum wage rules.

Our front runner is a salary of £84 per week adding up to £4,368 for 2006/7 (52 weeks x £84). Why the magic figure of £84 a week? Well at this level you don’t pay any NI, but you do get a full NI credit for the so-called Second State Pension. This pension has been designed to be generous to the lower paid, so for £4,368 a year you get pension entitlement as if you were on £12,500 a year!

Tip 1. Even if you are using dividends to extract most of the profit from your company, take a salary of at least £4,368 in the tax year 2006/7, which finishes on April 5, 2007. This earns a pension entitlement as if the salary were £240 per week (£12,500/52).

Tip 2. Record your wages in your wages book/record (even if you’re not paying any tax on it) and issue payslips and P60s at the end of the year - this supports what you pay. And sure enough, this is the Taxman’s next point of attack - “No payment no deduction!” A direct debit to make sure you get paid will help here.

Revised dividend. How does this affect the tax-free dividend calculation for 2006/7? The tax-free dividend now stops at £30,570.

(*) The dividend tax credit which can be offset is restricted to 10% of the taxable dividend.

Warning. Make sure your company has enough distributable profits to cover the whole dividend or the Taxman will attack it as invalid. For example, if Rita’s partner owned 50% of the shares in the company the total dividend would have to be £71,140 (£30,570/50 x 100) to allow the other 50% (£30,570) to be paid to Rita. Allowing for a Corporation Tax rate of 19% that would mean the company would need to make pre-tax profits of £87,827 (£71,140/81 x 100) to pay this level of dividend.