At this time of year, we see lots of people looking to take out dividends. Due to this festive rush, we thought it might be interesting to outline how the process works at GA. Below we have outlined how the process works internally.
If you are in the position where you wish to receive dividend from your company, the first thing to do is to contact our team. We will go through the following process to assess your company. We will then be able to advise you on the amount of dividend that is available for you.
Once a client asks us for a dividend the aim for us 3-fold:
- We want to ensure that we get back to our client with a yes/no etc. as quickly as possible. This means that including us in the process doesn’t add time to them or become a hassle.
- We need to ensure that the company can afford to pay the proposed dividend.
- We need to look at the personal tax implications and ensure our clients understand exactly what will happen in January.
Firstly we need to establish the net worth of the company. To do this we need to: get up to date bank information from the client; then accrue in any additional money the company is due to receive in sales for work done up to date; allow for any outstanding expenses including salaries up to date; and work out any outstanding taxes – VAT, PAYE and Corporation Tax – to see exactly what is left in the pot. This is the profit after tax and what would be available for the company to pay out as a dividend.
Once we know the maximum dividend which could be paid as dividend we need to work out the most tax efficient amount to take out. This depends on the client’s other income for the year (tax year 6th April – 5th April) – including any other jobs, rental income, bank interest, other dividends etc. When we know what the client earns we can decided how much dividend would be tax efficient to take out. This ensures they utilise their basic rate tax band and monitoring when they go into higher rate taxes etc.
We have to consider how much tax the client is comfortable paying and the level of income they are used to having/expect to have in any one year. Some clients just want to take out their £2000 tax free dividend and that is all – others want to just pay the basic rate dividend tax at 7.5% and others are looking for more income and are happy to pay the 32.5% higher rate dividend. It is important to have an understanding of your client and where they are comfortable/what their expectations are.
We then tell the client our recommendations, including the estimated tax bill they would expect if they took out dividend. This allows for forward planning and saves any nasty surprises for them further down the line.
It’s important to ensure clients take out dividends based on our recommendations and aren’t just taking money without consulting us. If they do that then they run the risk of not having enough money in the company to pay e.g their company tax bills or they might end up with a large personal tax bill as they take out large amounts of dividend without understanding the personal tax bill which comes alongside it.
As you might imagine this process is simplest for our cloud users. We have all of their data ready to view and up to date. This means that we can get an entirely accurate snapshot of their business within minutes of logging in and taking a look at their company position.
Dividends can seem like a complicated process but at Grampian Accounting we like to make it as smooth as possible. Therefore, if you want to get a dividend shortly, please let us know and we would me more than happy to help.