Budgeting for CT

RosesDad74

Hello all,

I am an established Telecoms contract worker. I had a question about CT and the best way to budget for it.

Should I leave a certain percentage of my dividend payment in my business account? This is what I am currently doing but I always questiopn whether or not it's the best.

Or should I withdraw the whole dividend, put a percentage to one side in a savings account and use this to pay the CT demand when it comes in? This will probably leave me liable for more tax come SA time as this would be a personal account.

Any thoughts or experiences to share?

Thanks,
RosesDad74

Debt_Free_Chick

By CT I assume you mean Corporation Tax, rather than Council Tax - this board deals with both

If Corporation Tax then my understanding is that the Company has a statutory obligation to withold tax from the dividend - so as a shareholder, the amount you receive can only be after deduction of that tax.

It rather sounds like you need an accountant to advise on this issue and any others you might have misunderstood.

mrkbrrws

No tax is witheld on dividends.

The Corporation Tax is not worked out on the dividends, it is worked out on the profits of the Company.

The dividends are paid from the profits after Corporation Tax, so the simplest way would be to keep the money to pay the CT in a Company bank account.

RosesDad74

Hi,

Yes - I meant Corporation Tax..sorry.

I do have an accountant. He tends to just chuck a dividend figure at me, and I have just discovered that he already accounts for this before I get the figure. I wasn't aware that he did this - so I have learnt something from here!

Thanks!

Pennywise

We have a couple of general rules for our clients, which sometimes seem contradictory, but aren't really!

Firstly, our advice is to limit dividends to what you actually need.

Secondly, our advice is to take as much dividend as possible each tax year to use up your personal basic rate band.

So, you see the contradiction. But let me explain.

If you keep your dividends to a level where no shareholder's total taxable income (inc grossed up dividends) exceeds the higher rate threshold, then there is no personal higher rate tax on any shareholder, so it makes sense to do it (subject to the company having enough post tax profit).

If you, as a shareholder, do need more dividends than the HR threshold, then you have to take the least amount you can live on. If you draw a higher dividend during the year and put some of it aside for the tax, you'll effectively be paying even more higher rate tax as the dividend you need for the tax itself causes you to have more higher rate tax liability the following year (if you see what I mean). So, by voting a smaller dividend, and keeping profits back in the company, then voting a dividend specifically to cover the tax in Jan/Jul, you're at least deferring the higher rate tax to the later year.

The whole idea is to spread your dividends between tax years to make sure that basic rate bands are fully used up. It is pointless to have dividends of say £40,000 in year 1 and suffer HR tax on £10k of it, only to have dividends of only £20,000 in year 2 and waste £10k of basic rate band - if you could have taken dividends of £30k in each year, you'd have avoided HR tax completely.

And for confirmation, the payment of a dividend doesn't affect the company's corporation tax bill at all - it doesn't withhold tax from the dividend and pay it over - the "tax credit" is a nominal (pretend) figure dreamed up by Gordon Brown that is a 10% rate (which doesn't really exist) and never actually paid to anyone (and this fool is running the country!).

Debt_Free_Chick

mrkbrrws wrote: »

No tax is witheld on dividends.

The Corporation Tax is not worked out on the dividends, it is worked out on the profits of the Company.

The dividends are paid from the profits after Corporation Tax, so the simplest way would be to keep the money to pay the CT in a Company bank account.

Sorry - very sloppy of me as I was intending to infer that the dividend is made out of net profits, so the company has already retained the CT in the calculation that results in net profit.

In fact, reading the OP again, although the heading is about CT I think he may be confusing his own personal tax liability on the dividend - if there is one - with CT. As an individual, he wouldn't be paying the company's tax bill anyway.

Confusing!