£11k tax on £25k earnings - seems excessive?!

deaston

I'm owner of a limited company and my accountant suggested putting some dividends through my partner to reduce my tax liability.

£18,000 went through her (although wasn't actually paid), but has this screwed-up her personal tax return?

She's self employed and in the 15/16 tax year made:
£4,984 from employments (tax paid PAYE)
£25,242 profits from self employment
£18,000 dividends

This means her "taxable income" is apparently £37,808, but the actual tax due on the dividends is only £1,354 which I will pay her.

The total amount payable, including student loan payments of nearly £3,000 and payments on account of £2,707 gives a total of £11,065.

For someone why has earned just over £25k, this seems excessive. Has my 'dividend payment' caused all her other tax liabilities to increase? Or are we missing something?

[Deleted User]

I have not even looked at the calculations but payments on account have obviously come into play for the first time. £11065 is, therefore, tax in two different tax years.

£18000 dividends 'through her but nor actually paid' - interesting!

deaston

[Deleted User] wrote:

I have not even looked at the calculations but payments on account have obviously come into play for the first time. £11065 is, therefore, tax in two different tax years.

£18000 dividends 'through her but nor actually paid' - interesting!

I agree. My accountant insists it's above board, but I'm no longer convinced. I won't be doing it next year!

So, the payment on account thing. HMRC expect her to pay £2,700 of tax on money she hasn't yet earned. I assume they expect her to borrow this money in order to pay it?

Seems unfair to me. Employees don't pay tax on salary they've not yet earned.

Darksparkle

deaston wrote: »

I agree. My accountant insists it's above board, but I'm no longer convinced. I won't be doing it next year!

So, the payment on account thing. HMRC expect her to pay £2,700 of tax on money she hasn't yet earned. I assume they expect her to borrow this money in order to pay it?

Seems unfair to me. Employees don't pay tax on salary they've not yet earned.

So where did the £18,000 go if not paid to her?

The payment on account is for the current tax year which we are already over half way through. So not really salary that hasn't been earned. By the time it's due to be paid there would only be just over 2 months left.

Employees pay tax each month as they go along. Someone who is self employed should be putting money away each month to do the same.

deaston

Darksparkle wrote: »

So where did the £18,000 go if not paid to her?

The payment on account is for the current tax year which we are already over half way through. So not really salary that hasn't been earned. By the time it's due to be paid there would only be just over 2 months left.

Employees pay tax each month as they go along. Someone who is self employed should be putting money away each month to do the same.

Ah of course, fair point. I guess the issue is that she's left it until now to do her tax return and hasn't been putting money away. Thanks for explaining that.

The £18k went into my pocket. Again, this didn't make sense to me but he was insistent it was allowed as we're co-habiting. Essentially, she has a 15% share of my business so my accounts show an £18000 dividend went to her. But it doesn't actually have to be paid to her.

Darksparkle

deaston wrote: »

Ah of course, fair point. I guess the issue is that she's left it until now to do her tax return and hasn't been putting money away. Thanks for explaining that.

The £18k went into my pocket. Again, this didn't make sense to me but he was insistent it was allowed as we're co-habiting. Essentially, she has a 15% share of my business so my accounts show an £18000 dividend went to her. But it doesn't actually have to be paid to her.

Seems very strange. Even if it was paid into a joint account you'd probably be fine but if it was paid directly to you then I doubt HMRC will accept it.

deaston

Darksparkle wrote: »

Seems very strange. Even if it was paid into a joint account you'd probably be fine but if it was paid directly to you then I doubt HMRC will accept it.

Ok, thanks for the advice. I'll certainly not be bothering with it next year.

Wayne_O_Mac

deaston wrote: »

Essentially, she has a 15% share of my business so my accounts show an £18000 dividend went to her. But it doesn't actually have to be paid to her.

So you paid yourself a £102000 dividend? Or are there other shareholders?

And if you didn't pay yourself that dividend, did the company have enough profits that it could have paid you a £102000 dividend?

Dazed_and_confused

Wayne

I think this may be a joke post, op starts by saying income is £37k (though those figures don't actually add up) then questioning why tax due is so high based on £25k.

There would be no additional dividend tax due for 2015:16 where total income is only £37k so op has got totally confused or some figures are wrong.

The whole thing is ridiculous, two tax years mixed up, thinking paying for 2016:17 is in advance, nothing more to say!!

TheCyclingProgrammer

You have been VERY poorly advised. You can't pay her a dividend and pocket it yourself. It's HER money. If HMRC investigate your tax return you will very likely be caught by a piece of legislation known as the settlements legislation.

In effect this means the dividends would be treated as if they were your income and taxed accordingly, because you have retained an interest in the shares (that were presumably gifted to her) because the dividends have been paid for your benefit (you've got the money!).

As somebody else pointed out, if she has £18k in dividends from her 15% share and you are the only other shareholder does this mean you've paid yourself £102k in dividends? If not then you have not declared your dividend correctly unless you've waived yours in which case, that waiver may also constitute a settlement of income too!

If you've never heard of the settlements legislation then this is further evidence that you have been very poorly advised. It is possible to share your company profits with a partner but it needs to be done properly and carefully.

I highly recommend you sack your accountant and find a good one ASAP, explain the mess and get them to help you fix it.

Edit to say: settlements legislation is not a straightforward piece of legislation and I've kept my explanations simple here. The risk of investigation is probably low but you really ought to reconsider your arrangements going forwards.

deaston

TheCyclingProgrammer wrote: »

I highly recommend you sack your accountant and find a good one ASAP, explain the mess and get them to help you fix it.

Seven years of being self employed and he's my fourth accountant (one of my past accountants is currently in prison). I explicitly said to this accountant I wasn't looking to do anything illegal/dodgy and wanted to pay the tax I rightfully owed.

So I'll be sure to flag-up this dividend issue, but I'm not changing accountants again!