In many small companies, the tax planning strategy is for directors to draw a “low” salary sufficient to ensure NI contributions are recorded, and any further funds are extracted by way of “dividend”.
The dividend is a distribution of profits and not tax deductible in the company. The key words are highlighted… there must be sufficient profits available to justify payment of the dividend at the time. These payments can be classed as unlawful if there are insufficient profits, and this has all sorts of potential repercussions, from both a tax and personal perspective. In the case of insolvency, the liquidator can pursue the directors personally for repayment.
This does mean that good quality accounting records need to be kept, and due provision for corporation tax payable also needs to be taken into account – as distributable profits are profits after tax.
If you are in any doubt, or want further advice, please contact us.
