What HMRC demanding more dividend details from LTD contractors really means

As a contractor running your own limited company you are bound to have heard the term ‘dividends,’ and undoubtedly will know that they form part of your take-home pay, but do you know how to declare them and the implications for your business?

More importantly for 2024-25, do you know that HMRC is considering the potential requirement to add more reporting around the declaration and payments of dividends? Old and new, requirements around declaring of dividends are vital to both understand and be across with your accountant, writes Helen Christopher, founder of financial and accounting firm Beansprout Consultancy.

How the new HMRC dividend proposal has come about

At the time of writing, dividends must be reported as untaxed income on your Self-Assessment each year, and they are reported in the main body of the return in the section “UK interest and dividends.”

Under current reporting requirements, all dividends are reported as one figure, irrespective of which company has paid them. This means HMRC has no direct ability to see what you have drawn from your own company, without connecting back to the company’s accounts and returns.

Hence, HMRC’s newly proposed dividend reporting requirements which would see contractors running their own limited company being asked to separately report the dividends paid by their own company on the ‘employment page’ of the return SA102. 

An odd experience – declaring divi deets on the return’s employment page

Reporting dividends on a tax return page relating to ‘employment’ might seem a little odd if you’re a contractor in business on your own account! But from HMRC’s perspective, this new level of visibility of the total income earned from a Personal Service Company (PSC), provides them with valuable insights into perhaps where they should be focusing their attention when it comes to IR35.

While not onerous to report the dividend figure in a different box on the return, it is important that contractors are both confident about their IR35 position, and their ability to pay dividends as well as the process for paying a legal dividend. So here’s a dividends refresher.

What is a dividend?

Dividends are payments made by a company to its shareholders from post-tax profits. Think of it as a ‘return’ to those who invest in the company.  In the case of a PSC, dividends often form part of a tax-efficient remuneration strategy and are combined with a salary payment.

For a business to pay dividends, it needs to be making a profit. And profits are the money left over after all expenses (like salaries, rent, and materials) have been paid and corporation tax has been charged by HMRC.

You must not pay out more in dividends than is available in profits from the current and previous financial years.

You must usually pay dividends to all shareholders in proportion to their shareholdings.

What contractors should consider when dividend declaring

A company's board of directors should decide whether to distribute some of the profits as dividends and in making that decision, they should consider factors like future growth plans, current financial health, and shareholder expectations.

As a limited company director you have a responsibility to ensure that the company continues to trade and can meet its debts as they fall due. You should only consider paying dividends if your business is consistently profitable.

You should also think about the future of the business and if the profits are needed for reinvestment for business growth, rather than being paid out as dividends.

You should maintain accurate and up-to-date books and records, so that you can assess the financial health of the business, ensuring that your business has a strong and stable profit.

It is also a good idea to establish a clear policy on how much and how often dividends will be paid. This policy should align with your business goals and financial situation.

In the case of a PSC, this can feel somewhat of a formality as the sole director/shareholder is the only decision-maker involved! But in some ways, this makes it even more key that profits are checked and the financial position of the company confirmed before any dividend is paid.

How to declare a dividend

To pay a dividend you must:

  • Hold a director’s meeting to declare and approve the dividend.
  • Declare the dividend and the amount payable – this is known as the ‘declaration date.’
  • Keep minutes of the meeting -- even if you are the only director.
  • Ensure shareholder records are up-to-date to determine who should receive the dividend.
  • Make the payment on the payment date and distribute the funds.
  • For each dividend paid, you must issue a dividend voucher showing the:
    • Date
    • Company name
    • Name of the shareholder being paid a dividend, and;
    • Amount of the dividend.

The recipient of the dividend should keep a copy of the voucher for their records and Self-Assessment.

Contractors, on your own or with help, it’s key to understand dividend tax implications

Dividends have a tax impact on both the company and the shareholders.

From a company perspective, dividends are paid from after-tax profits, meaning they don’t reduce a company’s liability to corporation tax.

Shareholders will need to pay personal income tax on the dividends they receive. The rate depends on the individual’s overall income and the tax laws in their country.

Dividend rates 2024-25

In England, the following tax rates apply to dividends for the 2024-25 tax year: -

Basic rate taxpayer                  8.75%

Higher rate taxpayer                 33.75%           

Additional rate taxpayer         39.35%

If dividends are declared more (by way of amount) than available profits they are deemed “illegal” and will be converted to a director’s loan account in the financial statements. This loan must be repaid to the company, within nine months of the year end if additional corporation tax liabilities are to be avoided.

If the loan is not repaid in the given time frame an additional corporation tax charge, known as ‘s455,’ is levied. The company must pay 33.75% of the loan’s outstanding value alongside the corporation tax due on its profits.

This additional s455 tax will be repaid by HMRC, once the loan is repaid, but this can cause cashflow issues for many businesses.

In addition to additional corporation tax, if the loan exceeds £10,000 at any point in the tax year and assuming no interest has been charged on the loan, the director will face a P11d charge. Additional income tax will be payable as well as Class 1A National Insurance payable by the company.

Final thought

So, you can see there are already several formalities to follow when declaring a dividend and getting it wrong can be costly in terms of tax. If HMRC does introduce further reporting requirements (as the government indicated in its response to industry replies to the consultation), let’s hope they are focused on information already to hand and part of the process rather than adding further complexities.

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Written by Helen Christopher

Chartered accountant Helen Christopher is a former head of finance & accounting and a former chief operating officer, who has worked for 28 years in corporate roles. Helen qualified as an accountant in 1995 with Price Waterhouse (now PwC) – the year she became a member of the ICAEW, and seven years prior to her becoming an FCA. Also a local magistrate for the Department of Justice, Helen specialises in tax, accounting and HMRC advice for small companies and their owners. 
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