If you operate your business via a Limited Company you’ll likely receive remuneration for your efforts via a salary and dividends.
As well as doing all of the filing of accounts and Corporation Tax Returns for your Limited Company, if you have untaxed income such as Dividends upon which Dividend Tax is due, you will need to complete a Self Assessment Tax Return.
What is the Self Assessment Tax Return?
The Self Assessment Tax return is completed by an individual. It’s the official return to HMRC where all income is reported, a tax calculation performed, an adjustment for the tax already paid in the year made with the net result showing the amount of tax due to HMRC or any refund which may be due back from HMRC.
Whilst many systems are in place for collecting tax, such as PAYE (pay as you go), completing a self assessment and recording all of your income is the only sure fire way to make sure that you have paid the right amount of tax in the tax year.
The Self Assessment Tax Year
The Self Assessment Tax Return is prepared by Tax Year.
The Tax Year runs from 6th April to 5th April.
For example the Tax Year 2022 / 2023 ran from 6th April 2022 to 5th April 2023.
The Self Assessment for this tax year is due by 31st January 2024.
The Company Tax Year
The company year end is set by Companies House when the company is formed. It is generally the end of the month in which the company was formed. For example, if the company was formed on 5th April the year end would be 30th April.
The company year can of course be changed. There is a formal process to do this at Companies House via an AA01 form. Bearing in mind that HMRC and Companies House are two separate Government Departments, you have to also tell HMRC that you have changed the year end.
Declaring Dividends
Dividends from your Limited Company are declared throughout the financial year of the company. These are reported in the Company Accounts.
However the company accounting year won’t necessarily align to the Self Assessment tax year.
So unless you have a good accounting system which does the allocation for you, you willhave to work out what will go on each self assessment by reference to the date that the Dividend was declared & taken.
As an aside, for most one person or small limited companies and to simplify things, dividends are declared and taken on the same day.
Aligning Dividends to the Self Assessment Tax Year
The only way to align your dividends to the self assessment tax year is by reference to the date that the dividend was made.
Let’s show this by way of an example.
Worked Example
Your company has a year end of 30th June.
In the accounts to 30th June 2022 the dividends taken were £24,000 as follows:
| 31/08/21 | £3,000 |
| 30/11/21 | £3,000 |
| 31/12/21 | £3,000 |
| 28/02/22 | £3,000 |
| 31/03/22 | £3,000 |
| 30/04/22 | £3,000 |
| 31/05/22 | £3,000 |
| 30/06/22 | £3,000 |
In the accounts to 30th June 2023 the dividends taken were £30,000 as follows:
| 31/08/22 | £3,750 |
| 30/11/22 | £3,750 |
| 31/12/22 | £3,750 |
| 28/02/23 | £3,750 |
| 31/03/23 | £3,750 |
| 05/04/23 | £3,750 |
| 31/05/23 | £3,750 |
| 30/06/23 | £3,750 |
Self Assessment 2022 / 2023
As this runs from 06/04/22 to 05/04/23 then the following dividends would be included on the self assessment for 2022 / 2023:
| 30/04/22 | £3,000 |
| 31/05/22 | £3,000 |
| 30/06/22 | £3,000 |
| 31/08/22 | £3,750 |
| 30/11/22 | £3,750 |
| 31/12/22 | £3,750 |
| 28/02/23 | £3,750 |
| 31/03/23 | £3,750 |
| 05/04/23 | £3,750 |
That’s total dividends of £31,500 for the tax year 2022 / 2023.
It’s worth noting that the dividend taken on 5th April 2021 is included on the 2022 / 2023 self assessment showing just how important it is to get the dividend dates and timings right.
Keeping the Books straight
All too often people get in a muddle with dividends as they have not kept their bookkeeping up to date and have taken random amounts from the company that could be for anything from salary payments due, expenses reclaimed to dividends. Who knows?
It is essential that you keep your books straight and show the money that you take from the Limited Company in the correct way as you go. Doing it this way makes it much easier to see the figures that you need for your self assessment as well as ensuring that you are not making an illegal dividend which could bring you trouble further down the line.
Payments from your company to you
Payments that you make from your company should be for one of three things:
- Expenses – the reimbursement of out of pocket expenses i.e. money that you have spent from your own funds on behalf of the company e.g. mileage, train tickets, parking, some stamps or stationery. You should keep a record of your expenses so that you can support the amount taken from the business. You can use an expenses claim form or an App for this
- Salary – amount that you need to pay to yourself for your salary as shown through your payroll system
- Dividends – amounts that you have declared and withdrawn from the company supported by the necessary paperwork
When you withdraw amounts from the company’s bank account you should record the transaction as either expenses, salary or dividends.
Keeping the books up to date is the right way to do things. It avoids the muddle plus it allows you to easily establish what you can withdraw from the company by way of dividends after establishing the profit and allowing for any corporation tax which will be due.
Sorting out the mess
If you have got into a mess with your accounts and have been taken random amounts from the company bank account without reference to expenses, salary and dividends then you need to sort this out as soon as possible.
In all likelihood you’ve plonked everything into a “Director’s Account” pot.
You will need to chronologically record the amounts taken from the business subtracting any expenses, the recorded salary and necessary dividend transactions so as to eliminate your Director’s Account balance.
This may be an area where your accountant can help you to get on track allowing you to keep the books right by recording expenses, salary and dividends as they happen going forward.