It’s a question we get asked a lot. There’s two important and completely separate considerations you should have when considering paying a dividend.
1) Can my company afford it?
2) Is it a good idea from a personal tax perspective?
Company retained profit
Let’s take the company side first. Dividends can only be paid out of retained profit. This means what’s left after you’ve set aside enough to pay all the company’s liabilities, including tax bills even if the due date is some time off.
Fortunately, FreeAgent does all the hard work for you, summarising it all into one number. Bizarrely they choose to hide this number in the very bottom right of the overview page, but it’s there as “Carried forward/distributable“.
See the example above for a business in a fairly healthy position. What this figure represents is what you’d hypothetically have left if you ceased trading today, collected in all debts owed to the company, and paid off any debts owed by the company. This is why it’s the absolute maximum dividend you can take, as otherwise you’d be leaving the company in a position where it can’t afford to pay its debts (ie you’d be defrauding the creditors).
If this number is negative, you can’t take a dividend at all. Your company is already insolvent, meaning it owes more to others than the value of its assets (ie negative equity). Taking a dividend anyway in this situation is technically illegal.
Inevitably as with anything, the data FreeAgent throws out is only as accurate as the data put into it…so make sure FreeAgent is up to date and that things like the bank balance in the software agrees to what’s _actually_ in the bank before making any significant decisions.
Also (stating the obvious) always clearing this figure down to £nil isn’t a great idea. Good to leave a nice buffer there in case things take a turn for the worse.
Your personal tax situation
Completely separate to the above, the question comes in over whether it’s tax efficient to take a further dividend at this point.
What other earnings have you had in the tax year to date? Dividends suffer 7.5% (barring first £2k for 6 Apr 2018 onwards) whilst a basic rate taxpayer. As a higher rate taxpayer they’ll suffer 32.5% personal tax. If you get above £100k total income, then the effective rate is higher still.
The key time for this is 5th/6th April. It makes no difference whatsoever what your company year end is. The personal tax you pay on dividends revolves around the personal tax year, 5th April.
Therefore especially this time of year (mid March at time of writing), if you’re thinking about taking a big dividend, it’s worth giving it a bit of thought. Does it make sense to take that dividend quickly now, or is it beneficial to hold fire until 6th April if you can?
Delaying until post 6th April will always delay the personal tax…but if it only delays it, is it worth it? Also, if you’ve only earned (say) £20k this tax year, and expect to earn (say) £60k next tax year, it definitely makes sense to rush through that dividend now. Nearly always better to pay a small amount of tax soon rather than a much larger amount later.
If you’ve been using FreeAgent for a while, you can easily see your relevant figures for the current tax year from the “My money” tab.
Top tip – you can also go to the “Taxes” –> “Self assessment” tab, click the current tax year and have a look at what the liability currently shows as. Scroll down the “Main Return” page, click “Yes” next to “UK interest and dividends” (if not already marked that way). Then stick in a figure you’re thinking about taking in the “Dividends” box then click elsewhere to save it. See what your liability is now. This gives you an easy way to get a good idea of what extra personal tax you’ll have to pay if you take that extra dividend. NB ensure you then delete this hypothetical dividend figure!
Again, the data FreeAgent chucks out is only as good as data that’s been entered…so check it’s correct before making significant decisions. Also things like student loans and higher income child benefit charge can have a significant impact.
For Maslins clients we tend to have a look at their personal tax position in February/March to advise. It’s generally a quiet time for us (after January tax return rush) and it’s the time you most want to be thinking about this…as simply waiting a day can potentially have a massive impact.
The boring legals
You should produce the board minutes and dividend voucher for each dividend. Once you’ve paid the dividend, uploaded the bank transaction to FreeAgent, and explained it, you can then easily get templates for these from “My money” –> “Dividends”. Strictly speaking you should print these out, sign and date, then file away somewhere safe.