When can I pay myself a dividend?
One of the main reasons for trading as a limited company is the ability to pay yourself dividends. Although the changes to the way dividends are taxed in 2016-17 has made the tax savings less attractive (see our comparison here), it's still an attractive option in many circumstances.
However one of the pitfalls of running a limited company is making sure you treat the company's money and your own money separately, and that you have enough profit to cover any dividends you declare.
In 'finance' talk, this means making sure you have enough distributable reserves to cover the dividends. Distributable reserves are basically the post tax profits the company has made to date less any previous dividends taken.
If you want to see how much your distributable reserves are at the start of the year, you can look at the 'Profit and loss account' figure under 'Capital and Reserves' on the balance sheet page of your accounts. Add to this your after tax profit in the current year, less any dividends you've paid out, and that's pretty much how much you've got left to declare.
Let's look at an example. If you had a profit and loss after tax brought forward of £10,000 (be careful if the figure on your balance sheet page of the accounts is negative - that means you've made a loss!), and your after tax profits for the current year are £5,000, then you can pay out dividends up to £15,000. If you've already paid out £10,000 of dividends, you've got another £5,000 that you can pay out.
But beware - if the profit and loss brought forward is minus £10,000 that means you've made a loss to date. Until your after tax profits for the current year are greater than £10,000, then you can't pay out any dividends. This is an area which we have seen cause quite a lot of owner managed companies problems!
You also need to be aware of what is meant by your 'after tax profit'. Not only do you need to take into account the corporation tax you'll need to pay on your profit to date, you'll also need to make sure you adjust for any significant accounting adjustments eg stock, bad debts, depreciation and accruals and prepayments.
For most owner managed limited companies the checks you need to make won't be too onerous. The problem comes when no checks are made, or you misjudge how much dividend you can pay, which can lead you into a nasty tax trap!
If you'd like to see how we can help you manage your dividends and avoid any unpleasant tax issues, please feel free to get in touch.