6

One of the more popular tax structures I keep hearing about, is using a company for revenues, which then pays dividends for it's sole owner. According to HMRC, in this case, the following tax structure can take place:

  • Company pays 20% taxes on all revenues earned
  • Company can pay the sole owner as eg. a self-employed up to the Personal allowance (£7,475) tax-free
  • The sole owner does not pay any taxes on dividends below £35K (reference)
  • Dividends above £35K gets taxed on a 25% rate

Two questions:

  • Are the above calculations correct?
  • I've heard an offhand comment being made, that a company can only issue dividend after it's first operating year. Is this a rumor, a de-facto verified thing by HMRC, or completely false?

Specific circumstances:

  • The newly created company will not have any expenses -hence, all incoming money is profit

Thanks in advance.

6

In a very basic sense you can only issue a dividend from distributable profits, which in practice is usually the businesses retained profits. As a new company you will not have any retained profits and therefore technically no distributable profits.

In practice though, many companies issue interim dividends before the year end, however you are best taking professional advice as to whether you are in a position to do this. If the company pays out dividends in the first year and then makes a loss you will have been deemed to make an illegal distribution. The 'dividend' can then actually be treated as loan rather than a distribution but there are potential tax implications there.

See ACCA guidance here on Illegal Dividends.

A Chartered Accountant will be able to advise you accordingly.

  • See edit / specific circumstances. In this case, is it legal to issue interim dividends? Also, can you provide references from HMRC / company house to this regard? – Silver Dragon Jun 6 '11 at 21:21
  • Without seeing the whole picture I would be possibly giving the wrong answer with regards to your specific situation which is why I would suggest consulting with an accountant. This is definitely an issue worth clarifying. The relevant technical guidance falls under Several sections of the CA2006. I have added a link to an ACCA technical issue which names specific sections of the CA appropriate. – Andrew Duncan Jun 6 '11 at 22:03
2

I think the £35K band applies to the "dividend income" not the "dividend paid to you", and so you would only actually get £31.5K (90% of £35K) in your pocket before the next tax band kicked in.

If your company will only supplying large VAT registered entities, then register for VAT yourself and elect the Flat Rate scheme - depending on your area of business, given that you have no expenses, your company will get an extra 7% - 14% on its income for free. Your clients won't care that you charge them VAT because they'll claim it back.

Finally, depending on what your company is for, beware of the dreaded IR35

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