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This podcast selection is taken from a series of Business Hub radio shows broadcast on Star FM between February 2011 and October 2014 with advice from basic book-keeping through to crowd funding, directors loans, cashflow and a whole lot more!

There's something for everyone so do feel free to download and share - it might just be the golden nugget of information you need for your business to succeed!Listen at Star 107.9 FM

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Business Trouble - your choices

Dividends or salary?

The Business Hub Show - 21 October 2012

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Listen to the Podcast to hear the full discussion. Below are some brief notes on the items covered

 

Mark

It has always confused me what difference it makes if you pay yourself a dividend or a salary

Garry

You wear many hats in your business as an owner manager. You are the owner of the company so you are a shareholder, you are a director so therefore responsible for the management of the business, and you are an employee. It is often difficult to keep these various roles separate, but it is very important that you do.

One area where it can become rather muddled is when it comes to paying yourself!  Which role should you pay?  Do you pay yourself as an employee in which case you would pay a salary through payroll with Tax and National Insurance deducted at source through PAYE, or do you reward yourself as a shareholder by declaring dividends?

There is no right or wrong answer, but if you are not very careful it can go horribly wrong. It is critical that you seek detailed advice from your Accountant as your personal circumstances may also have a bearing.

Mark

So what difference does it really make?

Garry

The big advantage in paying a dividend rather than salary is a reduction in your tax bill. In particular dividends as they are not remuneration do not attract National Insurance. With the employers rate at 13.8%, and employees at 12%, this could save you 25.8%. So it’s worth considering.

Mark

Sounds like a “no-brainer” - what can go wrong?

Garry

You can only declare a dividend when the company has distributable reserves. That is accumulated profits which can be paid back to the shareholders. If you pay a dividend that is more that the reserves then it is illegal and must be paid back.

You must therefore know with certainty and accuracy that you have sufficient reserves when you declare a dividend. That may be your Annual Accounts, but could also be Management Accounts if you are confident in their accuracy. If you are paying dividends more than once a year, then having up to date Management Accounts becomes even more critical.

The issue we often see is where a business has got quite valid advice from their Accountant to pay dividends (for tax planning reasons) based upon one year’s accounts and then continues to pay the dividends into the following year when profits have fallen and there are insufficient cumulative reserves to cover the dividends. The business gets to the end of the year and finds that the dividends paid in that year are illegal as there are insufficient reserves.  It is therefore critical that you check regularly.

Mark

Is there any paperwork to consider?

Garry

There is an important paper trail to follow. Dividends should be declared by a Board meeting so it is important this is recorded. For our clients we produce a comprehensive board minute which shows the board has considered the reserves position, and how. There also needs to be a tax voucher raised to show the tax credit that comes with the dividend. This tax credit basically means that basic rate tax is already paid on the amount received, and only higher rate tax is due should that be applicable from the recipient (which you would deal with under self-assessment).

 

 

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