S455 and directors loan account

Walcott wrote: »

Thanks. I'm not really looking at taking it out cash free. But I really am struggling here to get my head around how I clear the account down because the accountant and I don't seem to be on the same page. As of now I have basic rate PAYE available to me however the accountant will not run payroll to use that up in a bonus.

But with your and TheCyclingProgrammers post I am getting a much better underdtanding.

Question: what is your company year end date ?

seems to me you are ignorant of the workings on 2 separate issues and are confusing the two

(and the accountant is not being paid enough by you to be your teacher, and is actually acting in your best interest by refusing to "run payroll" as you want, since you clearly do not understand the implications of such a move)

1. Optimal amount of salary and dividends

i) Salary
(Assuming this company is your only source of employment income ie you do not have a job anywhere else at all) You take no more than the NI primary threshold as a salary via the company payroll subject to PAYE
that threshold means you a) get a credit towards your state pension and (most importantly) means b) you do not pay ANY income tax or NI at all on the salary.
For 18/19 (personal) tax year that means £8,424 salary with zero tax payable
For 19/20 the threshold increases to £8,632

That is all you take out via payroll, not one penny more. Forget "bonus" that is another word for salary and would just wreck what you want

ii) Dividend
For the 18/19 tax year the personal allowance was 11,850. You have used up 8,424 as (NI free) salary so have 3,426 tax free allowance left.
The dividend 0% tax band is £2,000
so, you take out £5,426 of dividends totally tax free.

so total income so far 13,850
basic rate tax band ends at 46,350
you therefore take 46,350 - 13,850 = 32,500 as further dividends upon which you will pay the "basic" rate dividend tax of 7.5% payable as part of the annual personal tax return (2,437.50 tax payable)

you state you cannot live on less than 78,000 per year (6.5k pcm), so (morality aside) you need to take a further 78 - 46.35 = 31,650 of dividends
they will be taxed at the higher rate dividend band 32.5% so you will pay 10,286.25 of tax on them as part of your annual tax return

overall therefore you have taken out £78,000 at a cost of 12,723.75 which is a composite tax rate of 16.3%

(take all 78,000 as salary/"bonus" and you would pay 19,560 income tax plus 5,184.12 NI, a composite tax rate of 31.7%. Also bear in mind the company would have to pay employers NI @ 13.8% on amount above primary threshold as well - can't be bothered to do the maths for that )

note the above assumes 6,500 pcm is the gross figure. If you want that to be an after tax figure ("net income"), then you have a major problem as you will be well over 100k gross and into a very different tax position that will take a lot more explanation than I am prepared to give you for free.

also the above assumes your company is making enough money to afford 6.5k pcm, otherwise you will need to change your lifestyle.

2. The DLA
You need to sort out the 25k overdrawn DLA as that is a matter of fact. You have 3 options:

a) you eliminate it by "converting" some of the money you have already taken out into dividends if your accountant / accounting software allows you to make such changes retrospectively. Obviously you do not alter anything that falls in the tax year 17/18 as you really do not want to have to refile your personal tax return for a closed year.

b) you declare a (paper) dividend dated on/before your year end to offset that balance. Agin, not if it falls before 6 April 2018 or be prepared for a possible HMRC enquiry and interest on any extra tax therefore due

In both cases the dividend is represented by the cash you have already physically taken out, therefore, the personal tax bill arising on the sum will need to be paid from the cash you have already removed from the company

or

c) you pay the money back into the company
- do so by year end + 9 months and the company will not have to pay a 32.5% tax charge (£8,125) to HMRC.
- Do so after YE+9 months and the company will have to pay £8,125 to HMRC, but the company can then claim a refund for whatever % of the balance has been paid back - the timing of the physical refund is then a matter of which year the repayment was made in as it will always be +9 months after the year end.
Appreciate very carefully, the refund is company money, it is not your personal money - if you take it out of the company you are repeating the cycle - that is why it is called a loan.

interest
as you have discovered, the DLA is >10k overdrawn, and therefore you will be charged interest for having taken a "free" loan from your company. There is no escaping that charge, even if you now repay. Whether your accountant allows retrospective dividends to reduce the balance below 10k at any point in time is a matter for their professional ethics

the company will also have to pay Class 1A NI on the loan balance as "punishment" for allowing it to get >10k

Footnote
if you take the above lessons on board, bear in mind a dividend must be declared in the company's minute book. You should not just take money out on a whim without creating the relevant paperwork.
Also if you take money out on a whim HMRC could decide that it is not a dividend at all, and is simply you evading payroll and the resultant PAYE. They would therefore penalise you.
You cannot take out a dividend if the company does not have the reserves to pay it from at the date it is declared. If the company's cashflow and profitability is variable, you should be able to show via management accounts (your accounting software) that at the date of dividend payment the company was acting legally. It is against company law to pay a dividend when the company cannot afford it. Such dividends would need to be cancelled and converted into PAYEable pay - with associated penalties for not reporting such payments on time - ie don't do it!!!