Bookkeeping for Small Business

If you are in the CIS scheme as a subcontractor, you may be able to apply for gross status where rather than being taxed monthly, you pay at the end of the year.  If you would like to know if you are eligible for gross payment status, please contact us.

This is a question we get asked frequently.  Currently sole traders have to pay personal tax on their profits, class 2 national insurance and class 4 national insurance on profits over £8424 at 9% up to £46,350 at which point Class 4 NI is 11%.  Sole traders have to pay a payment on account if their annual tax bill exceeds £1000.

Limited companies do not have to pay payments on account or national insurance but have to pay 100% of their corporation tax 9 months after the year end at a rate of 19% on profits.

Limited companies can have shareholders unlike soletraders.  When taking the combined personal tax and corporation tax liability for limited companies vs tax and national insurance for soletraders, the rough tipping point is if you have profits of £12,000 or more, it would work out to be more efficient for tax purposes to be a limited company.

Types of shares

When a company is incorporated at Companies House, it must have at least one share.  Most commonly shares are in £1 increments although this is not compulsory.  One penny, 25p, 50p and £5 per share are not unusual.  Ordinary A shares come with full voting rights.  Not all shares carry voting rights.  Typically, A shares do and the others don’t.  ‘Alphabet shares’ can be issued and it is most usual to have A shares for the directors and B shares for example, to the spouses, partners, children or employees.  Corporate entities can also be shareholders.  It is acceptable for one individual to hold more than one class of share in a company.

Who can be a shareholder?

If you are over the age of 16, you can be a shareholder.  You do not need to be a director to be a shareholder, nor do you need to be a shareholder if you are a director.

Who is entitled to receive dividends?

If you are a shareholder of a limited company and the company declares a valid dividend, you are entitled to receive a dividend should a dividend be issued to your class of share.  Just because you are a shareholder, it does not guarantee you will receive a dividend. 

How often can dividends be issued?

A company can only pay a dividend if it has distributable reserves.  This means it has made a profit after tax has been deducted.  Dividends can be taken at any time but it is advised to take no more frequently than quarterly.  Quarterly, half yearly or annually are all acceptable.  Doing so more frequently may be construed as salary by HMRC and be liable to personal income tax and national insurance at the prevailing rates.  Issuing a dividend monthly for £1200 and a salary of £987 is not realistic.  Profits rise and fall from month to month.  In the example below a company makes modest profits and every quarter calculates how much can be extracted in dividends.  You will see that the profits rise and fall over the course of the year and in this example, a total of £3807 can be taken in dividends over the course of the year.

Put simply, dividends are profit (sales minus expenses) after tax provision (19%) calculated on a quarterly basis.  It is not necessary to issue a dividend if you don’t want to but if you do, the guidance in this notice should be used.

What is the process for declaring a dividend?

The bookkeeper/business owner prepares the management accounts which shows CT provision and calculates the dividends available for distribution.  A meeting is held and it is agreed what dividends will be issued.  Take the example above.  In Q1 a profit of £1296 was available.  Let us say there are 3 classes of share.

John holds 1 A share and 1 C share

Janet holds 1 B share

Susan holds 1 D share

At the meeting, it is agreed to issue 100% of the profits equally between the 4 classes of share

25% of £1296 is £324 per share category.

In this example, John gets £648 and Janet and Susan each get £324.  Minutes and dividend vouchers need to be issued to John, Janet and Susan each time a dividend is issued.

Let us suppose in Q2, the dividend is only issued to the B share holder.  100% of the dividend (£405) goes to Janet.

John could use any combination he wants to distribute the dividends.

What is the tax implication on dividends?

For the year ending 5/4/18, each shareholder is entitled to receive £5000 tax free in dividends.  For the year ending 5/4/19, each shareholder is entitled to receive £2000 tax free.  Each shareholder is required to submit a personal tax return declaring their dividend income.  Dividends over the initial tax free allowance are taxed at 7.5% up to £34,500, the dividends are taxed at 32.5% with no national insurance contributions currently required.

What would you advise?

Doing your bookkeeping on a regular basis and producing and acting upon management accounts is crucial.  With MTD (Making Tax Digital) coming in in April 2019, it will be necessary for companies to submit their accounts on a quarterly basis to HMRC.  By doing your bookkeeping regularly, you will ease the pain of having to do this.   If you need more help or advice concerning dividends or bookkeeping, please contact us for an exploratory meeting.

Dormant Companies are defined in 2 different ways by Companies House and HMRC:

A Dormant company at Companies House is if any transaction goes through the business, then you are not dormant.  There are exceptions to this such as paying the fee for the Confirmation Statement, changes to shareholding etc. meaning if you have bank charges going through when you haven’t made any sales, then your company is not dormant.

HMRC state that if you are not trading then you are dormant meaning if you have don’t have any trading income or expenses you are classed as dormant with them.

If you have any further questions about dormant companies then please let us know.