Contractors’ Questions: Is my dividend at risk of being a director’s loan?

Contractor’s Question: I have recently set up a limited company that, while heading in the right direction, is nowhere near the £100,000 in revenue that some CUK forum users claim to be turning over. 

Talk of such a large number is making me confused. Currently, I pay myself the basic salary so I pay the minimum PAYE. At present, I have only £12,000 in my business account. But I also understand that I can pay myself up to £27,000 in dividends between now and April – and if it’s within that amount I won’t have to pay personal tax on it.

My question is, then, can I pay myself the full £12,000, as it’s within the limit, or do I have to leave something in my account to pay corporation tax? Or, does corporation tax only get paid on what is left after the £27,000 in dividends are paid?  In my case, can I pay the £12,000 without having to pay tax on that at all? Sounds too good to be true, I fear. But I will have more money coming in soon after I pay the £12,000 in dividends, so I am not worried about having no money in my account. However I am wondering about what, precisely, it is that I get taxed on?

Expert’s Answer: Your company has to pay corporation tax (at the rate of 20%) on its profits.  While you are able to deduct any payments the company pays to you as a salary when calculating its profits, you cannot deduct any amounts it pays to shareholders as dividends. 

Even though the company does not have to pay the corporation tax until nine months after the end of its accounting period, as a director of the company you need to ensure that it has sufficient funds to meet its liabilities before paying out a dividend. This means that you should ensure that you retain sufficient profits in the company to enable it to pay the corporation tax liability that has built up throughout the year.  Based on the information provided, you would need to keep back £2,400 of the £12,000 profit and pay yourself a dividend of £9,600.

Please note that if you need to take more than £9,600 (even though you know you have more money coming in soon), you run the risk of the amount taken in excess of £9,600 being treated as a director’s loan, rather than a dividend.  This has quite complex tax implications.

Lastly, you have indicated that you pay yourself a basic salary so you pay the minimum PAYE.  I am not sure what salary you are paying yourself, but based on your thinking - that you can pay yourself a dividend of £27,000 before you pay personal tax, I would estimate you salary to be around £12,000.  Assuming that you are a director of the company (and therefore not bound by national minimum wage rules) you may wish to consider reducing this amount as it may not be maximising your income due to the national insurance and PAYE costs. 

The expert was Martin Hesketh, managing director of contractor accountancy firm Brookson.