This is a question we often get asked. And to be honest, quite understandably too as it is one question that causes a lot of confusion for small business owners who trade through a limited company.
What are dividends?
Dividends are an alternative way of paying yourself using the profits from your company. Limited companies can issue dividends at the end of the financial year (final dividends), and at points throughout the year (interim dividends), which is common when the directors or shareholders rely on this for income.
As long as your company is making a profit, or has reserves from previous years, you should be able to draw dividends to top up your monthly salary. Your company does not need to pay tax on dividend payments, but shareholders may have to pay Income Tax if they’re over £2,000. However, you cannot count dividends as business costs when you work out your Corporation Tax.
Dividends work differently than a PAYE (Pay As You Earn) salary because they are not liable for any National Insurance and you pay less Income Tax than a salary.
So despite paying corporation tax (currently 19%) this makes them a very attractive option for many directors. As an employee taking a salary, you are liable for tax and National Insurance contributions, which will be taken as a proportion of your earnings.
Tax on Dividends (above your allowance)
The tax you pay depends on which Income Tax band you’re in.
|Tax On Dividends
To find out your tax due, add together your income from dividends to your other taxable income to work out your tax band.
The personal allowance rate for salary rose from £11,850 to £12,500 in April 2019 and the dividend allowance remained at £2,000.
These changes mean that it could be more beneficial to pay yourself a slightly larger salary and reduce your level of dividends.
For this example, we compare the income after taxes for three scenarios, all of whom have earned £80,000 in gross contracting fee income.
- is paying themselves via a salary
- has taken an £8,632 salary (2019/20 NiC Primary Threshold) and is taking the rest in dividends, and
- is splitting the income via salary and dividends between two equal shareholders
||Gross profit before tax
||Tax Sub Total
||Net profit, therefore dividends payable
||Tax on dividends
||Income After Tax
If you would like us to calculate which formula of salary v dividends is better for you, please contact us at firstname.lastname@example.org but please remember….
Focus on your business and making as much money as possible – tax is a consequence of being profitable and shows you and your stakeholders that the business is doing well.
Do you work in the construction industry and use, or are thinking of switching to Xero?
Manually calculating CIS deductions can be time-consuming, and it’s easy to make costly mistakes. So let Xero do the hard work with accurate, automatic calculations and deductions.
One of the biggest developments to Xero recently is the Construction Industry Scheme add on. Xero CIS makes it easy to manage your Construction Industry Scheme obligations including – deductions and payments, managing contractor invoices, subcontractor bills, filing your CIS returns with HMRC and bulk email payments.
Xero Benefits to the Construction Industry
- Automatically calculate the right CIS tax deductions and file your monthly returns directly from Xero
- Sync Xero seamlessly with third-party apps for for inventory management, project management, time tracking and more.
- Invoice clients and pay subcontractors faster with online invoicing.
- Check on cash flow at any time with the online dashboard.
- Store all your documents online in Xero in one central, secure and easy-to-access place.
Basic CIS features
- Automatically calculate and apply CIS deductions to your invoices and bills.
- Report on deductions you’ve made from payments to subcontractors, and file manually with HMRC.
- Download payment and deduction statements to manually send to your subcontractors.
CIS Contractor add-on
You’ll need to add the CIS Contractor add-on to your pricing plan to use some features.
CIS Contractor only features:
- Online filing of CIS monthly returns with HMRC from Xero.
- Bulk email payment and deduction statements to subcontractors from Xero.
- CIS Contractor is free until 31 March 2020.
Whether you’re a builder, plumber, plasterer or carpenter, Xero is simple accounting software that gives you an up-to-date view of your numbers while you’re on the move. Use it from your office, van or the building site and keep your business healthy.
FOR MORE INFORMATION ABOUT USING XERO CIS, PLEASE GET IN TOUCH AND WE WILL BE HAPPY TO HELP. CONTACT US HERE OR CALL ON 01392 495483.
A RUNDOWN OF THE LATEST UPDATES TO THE XERO ACCOUNTING PLATFORM
If you have accounting or Xero OCD you will be aware of the latest Xero update, however for all non-accountants or bookkeepers, here is a rundown of the latest updates from January 2019 – March 2019, to the cloud-based bookkeeping and accounting platform.
- Style changes, including a new Options menu where you can create a bank rule or delete a bank statement line.
- We’ve also changed how bank accounts are displayed when you transfer money between your accounts.
- You can now add notes to your invoices when viewing or editing them in new invoicing.
Xero for Business Android
- You can now edit submitted and unpaid bills in the mobile app.
- More detailed invoicing is now available in Xero Projects which shows project time entries as individual line items on the tasks & expenses invoice.
- You can now rename, delete and move bill attachments to your files inbox.
- Xero now emails a reminder when it’s time to re-enrol employees in a workplace pension.
- You can now add payroll benefits such as private medical and dental insurance in Xero. Set up the benefits starting with the 2019/20 tax year and we’ll calculate and file the taxes. Register with HMRC before 6 April to add payroll benefits in Xero.
- The pay item category for employer pension contributions has changed. These contributions used to sit under Benefits, they now sit under Employer Pensions.
- You can now add student loans to an employee’s tax details, Xero will calculate the employee’s student loan deductions for each pay run.
- Xero HQ now searches for duplicates every time you add or update a client as well as when you import clients. The banner alerting you to potential duplicates isn’t dismissible and is now visible to all practice administrators.
Xero for iOS
- You can now add file attachments to all quotes.
Xero for Mobile
- Access contact details including notes and invoice activity, using a new contact summary screen.
VAT return (UK)
- You can now switch to MTD (making tax digital) for VAT filing through Xero and can then start using our new Making Tax Digital (MTD) VAT return.
For more information about using Xero to organise your business finances, please get in touch and we will be happy to help. Contact us here or call on 01392 495483.
You want to grow your business, but how?
Your available operating expenses are taking up in the day-to-day running of the company. You can see a pipeline forming, yet you don’t have the staff to meet the fulfilment of the work that is on the horizon.
The team at the Finance Department have recognised that as a small business wanting to grow, cashflow is often the problem. Being able to get enough money in the bank to fund marketing, staff, equipment, office space etc. is a challenge. And when the ‘Oh my goodness I need more staff / a new computer / bigger office’ comes, what do you do?
To help make your business growth journey smoother and easier, we have teamed up with Capitalise to offer you a financing solution that could see your business steam ahead of your competitors.
It can be a minefield trying to find a lender whose experience and lending criteria matches the specific needs of your business. As a trusted partner of Capitalise we can support your business needs by matching up your business financial requirements with specialist lenders within your industry.
Being a Capitalise partner, we have access to over 300 finance lenders so whether you’re looking for additional finance to complete a merger, a new business acquisition, or simply need some working capital to keep your company ticking over, we can help to match you with a specialist lender that meets your cashflow and business needs.
The Finance Department is delighted to be a Capitalise partner offering you a financing solution that can take your business to the next level.
Just a few ways business finance can help:
• If you want to invest in new equipment, but don’t have the funds, asset finance could be a cost-effective way to fund purchases and spread the cost of equipment over its economic life. We have lenders specialising in hire purchase, leasing and refinancing.
• Invoice finance allows you to use your business invoices to get paid up to 95% of their outstanding amount upfront. Payment can be quick with invoice finance – usually in under 24 hours, one approved for the facility.
• A merchant cash advance also offers quick access to capital and is an established alternative to traditional bank loans. You use your credit card transactions to secure funding – and pay back a small percentage when your customers pay with a credit or debit card.
• With trade finance, you use your purchase orders to get funding. Our lenders will fund your suppliers upfront based on confirmed orders and finished goods. Funding can be received in a few business days, once approved for the facility.
• Working capital finance is intended for everyday business costs such as salary payments. Working capital loans are an easy and hassle-free way to secure funding and again, once approved for a working capital loan, funding can be received in just a few business days.
• Property finance has become a staple form of funding that now features in almost every commercial property purchase or redevelopment project. You’ll also have access to rapid bridging loans, development and commercial finance.
For more information about how you can grow your business, please get in touch and we will be happy to help. Not only can the Finance Department help with finding the right financing solution for your business, but we can then complete the plan, budget and forecast for you to really make a difference.
IF YOU WOULD LIKE TO EXPLORE HOW WORKING WITH THE FINANCE DEPARTMENT CAN HELP YOUR BUSINESS GROW, CONTACT US HERE OR CALL ON 01392 495483