Contractors' Questions: Can dividends be used to reduce my tax bill?
Contractor’s Question: Can director dividends be put on my corporation tax return as expenditure in the same category as donations and office stationery?
Expert’s Answer: The simple answer is ‘no’ - dividends cannot be put in this area of your company tax return. I will explain why.
In a small limited company, the people who own the company (shareholders) are often the same individuals who run the company (directors). These are still two separate roles though, and rewarded differently accordingly.
Directors, like any company staff, can receive a salary for the work they do, and these salaries are part of the company's running costs and reduce its tax bill.
Shareholders may be paid dividends by the company if it has enough profit to do so. However dividends come out of the profit after the company's corporation tax bill is paid. That's why they can't be used to reduce that tax bill.
Even if the shareholder is also a director, his/her dividends can't be treated as a running cost to reduce the company's tax bill, because all dividends come out of profit after tax - not profit before tax.
The expert was Emily Coltman, chief accountant at FreeAgent, an accounting software platform tailored to micro-businesses.