Introduction

How much dividends can I take from my business? This thought is a common one when you run your own company. What’s more, when you calculate this, you are going to work out the levels of your post-tax profits. It’s also key to know what these are on an ongoing basis. To sum up, the amount of profit that is available, in turn, determines how much your business can pay you in dividends.
Besides, when your company pays dividends, they are paid to the shareholders in the business. Your company should also pay the shareholders in their respective share ratios.
Now, before I move on, there are many aspects to paying dividends. These include when should I pay them, the timing of paying them, how much can I pay (this article), the dividend allowance and illegal dividends.

If your company pays you too much

You should not overdraw your dividends as a contractor. If this occurs, this could mean that you draw from funds that are required to cover its future tax bills. To sum up, you need to know what is available as dividends from your company now.
It’s also possible that your company can pay more dividends than are available at any moment in time. When this happens, any surplus amounts that you draw from your company will need treating as a director’s loan. In turn, further tax issues can arise due to the loan. If you ever find yourself in a position at any time where your company cannot pay its taxes, there are certain things that you need to consider.

Methods to use 

How much can my business pay in dividends? -1st method

When you work out the amount of available post-tax profit in your company you can use the method that I show below:
  • First of all, I take my business turnover in the current financial year  
  • Then, I deduct my business expenses in the current year  
  • Next, I subtract what my business pays me as my gross salary in the current fiscal year  
  • In turn, this gives my company’s profit before Corporation Tax (CT) 
  • Now, I deduct my company’s CT at the current rate of 19%. Apply this rate of tax to the profit before tax figure in the previous line.  
  • As a result, this gives me my company’s profit after CT. 
The company’s profit after CT is a key figure to know in your business. This figure shows what’s available to you as dividends out of the current year’s profits.
The final step is to add your company’s retained earnings from the previous accounts period on to the figure above. This amount (it is the Profit and Loss account) shows on the Balance Sheet in the last set of financial accounts.                                                                                                                                                                                                                                                     

How much can my business pay in dividends -2nd method

You can also work from the company bank account balance(s) as a different method. If you use this method, it will also show how much is available in company profits. You can use the following method to do this:
  • First of all, I take my company’s current bank account balance. If I have more than one company bank account, I add the bank account balances together.  
  • Next, I add on to this any company sales invoices that I have raised, which are outstanding. 
  • Then, I deduct from this any company tax bills that are outstanding. You need to calculate these right up to the present day.  

UK company taxes consist of 

  • Value Added Tax (VAT). Usually, any VAT that you owe is any VAT that you have yet to declare on the next VAT return. This VAT may include the last quarter’s VAT bill, which your company has yet to pay.  
  • Pay As You Earn / National Insurance (PAYE/NIC). You usually pay this on each quarter or each month. Any PAYE/NIC that you now owe is generally for the latest month or quarter.
  • CT. You pay this on an annual basis. You may not have yet paid last year’s CT charge at the current time. Therefore, the CT that you currently owe is the CT for your company’s current financial year. This CT may include any CT that you owe for the previous business year. 

Going forward

On an ongoing basis, as a UK contractor or business owner, you should try and keep track of the profit in your company.
If you do this, you then know how much your business can pay you as dividends at any time.
You are also then aware of what you should leave behind in your company to cover the various tax bills.
If you follow the above methods, this makes sure that you do not leave your business short of its tax bills later on. When you do this, it can present problems for you to try and resolve at a later date. If this occurs, you need to make up any shortfall. As a result, you also have to deal with any tax consequences.

Final thoughts

If you are a director of your own company, it’s certainly good to know what you can draw from this. It’s good practice to work out your business profit and keep a note of this on an ongoing basis. By doing this, you are aware of the dividends that you can take should the need arise. When you do this, it also makes sure that your business does not end up in financial difficulty at a later point in time.
As a final thought, now you know how much your business has in profit, you can also consider something else. When you take your dividends, how does this impact your tax position? If your income is above £50,000 gross, it will incur higher rates tax. Therefore, please have a read of my article that covers maximising your basic rate tax band.
Link to Contractor Advice UK group on LinkedIn    https://www.linkedin.com/groups/4660081/

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