How much can I take from the business?
Deciding how much to pay yourself as a business owner can be confusing. You have been told that a salary/dividend split is the most tax efficient way of taking money from the business but you don’t know how much you can take in dividends. You can see cash in the bank, so can you take all that?
You may have heard of the term illegal dividends, you may have taken a bounce back loan and now you don’t know if you can take money from the business.
What is a dividend?
A dividend is a payment a limited company makes to its shareholders, if it has made a profit. After paying all the business costs and taxes such as Corporation Tax, they money left over can either be reinvested into the business or paid as a dividend.
How much can you pay yourself in dividends?
You can only pay a dividend from your limited company if there is enough retained profit in the business to cover it. You will need to make sure that you have enough money left in the bank to cover the day-to-day costs and having a cash forecast will help you to feel secure that this is covered.
If you take out more than the available profits for the current and previous years, the dividend might be illegal and this could lead to penalties. So with the current environment and the impact of Covid you may find it more difficult to know if you can take money from the business.
Why shouldn’t you just withdraw your bank balance from the business?
You can see money in the bank, so why can’t you just withdraw the whole amount? It is important to not that your profit will be different to what is currently sitting in your bank account and this is for a number of reasons:
Dividends can only be take after tax such as Corporation Tax and VAT have been paid/money held aside
You need to remember that taxes such as Corporation tax, VAT and PAYE need to be paid and the timing of those payments. Corporation tax is due at the latest 9 months and 1 day after the annual accounts date, therefore you should calculate how much this will be and ensure there are enough profits to cover this. VAT and PAYE are generally paid on a quarterly basis so you should keep this aside too.
You should aim to save for these taxes over the year, putting the money aside in a separate bank account or using the “spaces” or “funds” part of some bank accounts. This way you will not be tempted to withdraw anything that is not the business’.
The timing of payments in and out of the business – profit is calculated after adjustments have been made to match costs and sales to the correct accounting period.
If you pay for an invoice now but it covers the next 12 months, then the accounts will need to be adjusted to move some of this cost to the correct accounting period. Examples include insurance, advance rent payments or payments for Zoom in advance. This will mean that the bank account will not reflect the profit in the business.
Unpaid invoices, if you owe suppliers money then the bank balance will appear higher until you have paid these.
A cash forecast can help you with this, as it will show when payments and income will actually be paid or received. Make sure you have enough money to pay your suppliers and manage the businesses day-to-day cash flow.
Impact of the pandemic
Business cashflow may be uncertain and reduced.
Personal cashflow could have been impacted and therefore you are looking to the business to help you.
Profits may have fallen meaning profit reserves could have significantly reduced; therefore, the business may be unable or limited in its ability to pay a dividend.
Had the business already paid dividends before the pandemic hit? These will need to be taken into consideration.
Over the course of the pandemic, profit reserves are likely to have been reduced and this can cause problems when drawing dividends from the business. Illegal does not mean criminal but means it is against Company Legislation and is repayable; it would be taxed as a “repayable loan”.
Let us consider some examples
Paul draws out the businesses post tax profit every year as dividends. He does not leave any profits in the business and therefore the profit reserve is reduced to zero each year. He will therefore not be able to draw a dividend this year if the business hasn’t made a profit.
Zoe on the other hand, has not drawn all available profits as dividends every year, and instead has built up a steady reserve of post-tax profits. Even though Zoe’s business has experienced losses during the pandemic, she is still able to draw a dividend this year as she has profit reserves from previous years.
Beware that HMRC will be looking for any signs of negative reserves and potentially illegal dividends. When accounts are filed at Companies House, HMRC will be able to see if you balance sheet has negative reserves, this could prompt them to question whether the business has been paying illegal dividends.
How does my company pay a dividend?
Make sure your dividend is correct and legal by following these steps:
Hold a directors meeting to declare the dividend
Keep the paperwork for all dividend payments, including minutes of the meeting.
Draw up a dividend voucher for each dividend payment
What is a dividend voucher?
A dividend voucher is an essential for dividend declarations. It’s basically a receipt, showing a complete record of:
your company’s name
the date the dividend is paid
the names of the shareholders being paid a dividend
the full amount of the dividend
You should give a copy of the voucher to all recipients of the dividend amount and keep a copy for your company’s records.
Make sure you are keeping your accounts up-to-date, accounting for payments which have not yet been paid such as Corporation Tax and confirm that dividends are not illegal.
If you would like help understanding the best way to take value from the business, book in for a 15 minute free discovery call: Book here.
1. Book a call with me: https://southbourneaccountancy.co.uk/contact-us/
2. Download my free guide on “7 mistakes to avoid – to stop your fitness business running out of cash” https://southbourneaccountancy.co.uk/fitness-ebook/
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5. Grab a copy of our “32 ways to extract value from your business” – tax savings. Here https://southbourneaccountancy.hubspotpagebuilder.com/32-ways-checklist-to-extract-value-from-your-business-save-tax-now