Last week we looked at two options when taking money from your company. This was either salary or dividends and we looked at the tax consequences of both options. If you want to get the basics from last week’s blog Read here
When deciding to take salaries or dividends your circumstances may not be straightforward:
1. There can be different shareholdings
2. There can be different needs
3. You can pay dividends to help with a close company surcharge
We will explore some options below. Sometimes the less straightforward scenarios can often be the norm.
David and Luiz own a hair accessories company. It specialises in the supply of Brazilian hair straighteners. Better than a Dyson, they say! David owns 75% of the company and Luiz owns 25%. David need €10,000 to clear some expensive credit card debt so that he no longer pays this from his net salary. Luiz needs a similar amount to pay for a new gym in his house that he recently kitted out. In this case, a bonus may be the best and easiest option.
|Gross Salary David & Luiz||€41,667|
|Corporation Tax Saving||12.5%||€5,208|
|Net Tax cost||€16,459|
For the dividend example, we will assume that there are 100 shares in issue. David has 75 and Luiz has 25.
For David & Luiz, to get a net dividend of €10,000 now they would both need a gross dividend of €13,333
|Dividend Withholding Tax||25%||€3,333|
This would be €177.78 per share for David. If Luiz got the same amount per share his gross dividend for 25 shares would be €4,444. After withholding tax his net dividend would be €3,333. This amount doesn’t work for Luiz.
You cannot declare different dividend amounts per share. All shares of the same class would have the same entitlement to dividends. There can be solutions to this problem by changing the share classes, but it can get a bit complicated. You will see that if they had equal shareholdings there would be no issue. If it was a husband and wife or civil partners that owned the company, then there may be no issue. This is on the basis that all the money is coming into the one household
For Luiz to get a gross dividend of €13,333 he would need a dividend of €533 per share. If David gets the same amount per share it would result in a gross dividend for him of €40,000. This would increase the total cost to €53,333 which is a lot more than the salary cost without meeting the needs of both.
Backdate a bonus?
Owner Directors can declare and pay a bonus within 6 months after the end of the accounting year. They can get a deduction for that bonus in the prior accounting period. How will this help? Assume that David & Luiz had a profitable 2019 in their company. The company prepares accounts to 31 December 2019. They declare and pay the bonus for 2019 before the 30th June 2020. In this case, they can get a deduction for that bonus in the 2019 accounts. The bonus would be subject to payroll taxes when paid in 2020.
The corporation tax return file and payment date for 2019 is the 21st September 2020. The profits for 2019 will reduce by the amount of the bonus. There will be an immediate corporation tax saving of €5,208. They can pay a bonus later than 6 months after the end of the last accounting period. The company will still get a deduction for the payment. The cash benefit would happen in 2021. This is when the Corporation tax return for 2020 is due for filing and payment.
In the last few months, we would have put through bonuses for some of our clients. These will be reflected in the 2019 accounts and they will reduce the corporation tax for last year. For 31 December 2019 year ends, there is still an opportunity to pay before the end of this month.
Dividends for Close Company Surcharge
A company can have non-trading incomes. Income like dividends, rental income, and deposit interest are liable to an extra tax. This is a close company surcharge. After- tax investment incomes, greater than €2,000, are liable for the surcharge. Close companies are under the control of 5 or fewer people. For more information read here
The surcharge increases the effective rate of corporation tax on the investment income. It is there to encourage owner directors to take this money out of the company, through a dividend. The dividend taken from the company would be liable at the taxpayer’s marginal tax rate. It is best to look at an example to explain it.
Loads of dosh ltd has a year ended the 31st December 2019. It had a very good trading profit of €250,000. It also had a rental profit of €15,000 and €3,000 deposit interest.
The surcharge is calculated as follows:
|Total Investment Income||€18,000|
|Deduction for Corporation Tax||25%||€4,500|
|Net after tax||€13,500|
|Deduction for a trading company||7.5%||€1,013|
|Amount liable to surcharge||€12,487|
|Close company surcharge||20%||€2,497|
The company would have to pay the surcharge with the tax on the profits of the current accounting period, ending on the 31st December 2020. To avoid payment of the full surcharge the directors would have to pay themselves a dividend of €10,487. This is the amount liable to the surcharge in excess of €2,000. They would pay this within 18 months of the end of the accounting period. They would have up to the end of June 2021. For David and Luiz this is a dividend of €104.87 per share.
|David 75 shares||€104.87||€7,865|
|Dividend Withholding Tax||25%||€1,966|
|Luiz 25 shares||€104.87||€2,622|
|Dividend withholding tax||25%||€655|
The choice for the directors is to pay the surcharge or to pay themselves a dividend to avoid the surcharge.
The above example shows that in certain scenarios there can be a tax write off for dividends. This is in a case where a company has investment income. Where it only has trading income then salary or bonus is the best option. You can see from the above how the timing of the bonus can reduce the corporation tax payable sooner. When there is investment income you would have to look at the circumstances of each case to see the best option. You can of course do both and we would recommend this for a number of our clients
To get a deeper dive into some of the Close company provisions Click here
It shows that it is not tax-efficient to have investment-type assets in trading companies. We will look at this in closer detail soon.
If you need any advice, please contact us. Click here You can call Deirdre on 051396703 and she will point you in the right direction. As always seek help from your trusted advisor.