linited company dividend/salary question for my tax return

[spongecake]

hi, i am hoping someone can help me and its straightforward. I set up a ltd company last year and have not paid my self a salary as yet. However, at year end I have a profit and would like to take dividends (drawings). Would it be better for me tax wise to backdate a salary (if i can do this?) or just take a lump sum?

i don;t have an accountant as they want to do the books as well and i have that covered. its just my tax return.

depends on a couple of things - like your tax rate and the rate that your company pays.

if you pay salary to yourself, it'll be liable to tax and NI (at whatever rate you pay but could be as much as 41%) and company will also have to pay employers NIC on it (up to 12.8%) -the company should be able to deduct this so there is some relief(Although if it is a large amount proportionate to what you do etc the tax man may query this). There are also company filing returns that need to be made in respect of the PAYE/NIC (both in month you pay it over to HMRC which is strictly the month following whenever you pay it) and at end of tax year . There are penalties too for late filing/payment.

backdating salary is complicated - there are legal issues around it too but by backdating salary you're goign to end up in a position where company is late in paying it so you could get charged penalties.

if you pay a dividend out , no deduction for company and you'll pay tax at a maximum effective rate of 25% (actually you pay at a slightly higher rate but get a deemed tax credit). This tax is due to be paid by you personally trhough self assessment system - basically this will be in the 31 jan following the tax year in which you receive the dividend.

poppy, thanks very much.
i think i have missed boat this year as my y/e was end aug, so will just pay myself dividend take the tax hit at 25%. i have no other income at all and i don;t employ anyone else. the company pays no tax only vat each qtr and corp tax.

tbh if you don't mind tax cost it is probably adminstratively simpler to declare the dividend - you'll need to do board minute or something declaring dividend to show in your books. Plus it won't tie up any more of your co funds having to pay PAYE on it.

hi there, thanks again. i will hold a board meeting asap, and get it transferred. i am cross with myself as i will end up paying tax on it twice- corp tax and then personal taxation.

can you not declare a bonus ? haven't got my legislation to hand re when paye is due but its usually ok if not declared/accounts not signed off for directors. Also if not a huge amount you shoudl get a corporation tax deduciton for it

legally you can't declare a dividend now and then put it on your 07/08 tax return (the one due by January). You have to have declared the dividend prior to 5 April 2008. This is not to say that it isn't done, make sure you get the correct paperwork in place.

With regard to a salary/bonus - you can have a bonus and get the corp tax deduction if the bonus (and related PAYE/NI) are paid within 9 months of the year end (ie when the corp tax is due). Again, legally the bonus should be declared before the year end.

You need to look at your overall renumeration strategy.

1. Take a small salary equal to the personal allowance (or for 08/09 the NI allowance - this is lower than the tax allowance due to the extra £600 from the 10% band cock-up).

The benefits of this are that

• the salary is corp tax deductable, but you wont pay tax nor NI, and the company won't pay Employers NI
• paying at this level gives you enhanced eligibility for second state pension purposes, it is as if you have paid £12,000.

1. Then need to consider how to take the remainder, dividends are effectively tax free if you are not a higher rate tax payer (They are taxed at 10% but come with an associated 10& tax credit). For higher rater tax payers they are taxed at 32.5%, but the 10% tax credit reduces this to 25% of the actual dividend.

BUT dividends are not corp tax deductable.

Nowadays it is a fine balance as to whether it is best to take dividends or salary.

Other things - charge all your business mileage to the company at 40p per mile - you get this tax free.
Make a charge for use of home as office (though this is minimal).

wow thanks so much for your help if you are an accountant are you looking for a client?

IF I am an accountant - lol.
You would be best finding yourself a decent local accountant - word of mouth is usually best.

thanks anyway. i have tried but it a very small town i live in, and the one i went to wanted to charge me £100 a month- he wouldn;t just do my personal tax. guess i'll rely on the hmrc helpline

so who is doing the limited company accounts and corporation tax return?
TBH given the questions you are raising you do need an accountant.
Depending on the level of transactions and work needed £1,200 (presumably including VAT) isn't that bad. But if the company accounts are perfect and you just need it all pulling together then maybe £500+.
Personal tax return with salary, drawings, interest £100+.
But from this thread you don't just need that, you need a remuneration stategy.