Your company, your bank?
You may be tempted to take a loan from your own company, however such a loan can create tax charges for you and the company:
Where a loan exceeds £5,000 you will be taxed on notional interest of 4% a year, unless you actually pay interest at or above that level to the company.
The company has to pay tax of 25% on any your loan outstanding more than nine months after the company’s accounting year end. This tax is repaid once the loan has been repaid or written off.
To clear the loan the company could vote you a dividend, but that dividend must be legal, otherwise HM Revenue & Customs (HMRC) may treat the payment as a further loan.
All shareholders with the same class of shares must receive the same amount of dividend per share. A shareholder can waive their entitlement to the dividend, but there must be enough cash available to pay your dividend plus any waived dividends.
To pay a legal dividend it is not sufficient just to write ‘dividend’ on the cheque stub or against the accounting entry in your loan account with the company. The directors must first determine whether there are enough profits available to pay the dividend (that is, it is the retained profits plus the current year profits to date that are relevant).
The directors can recommend that any profits which they consider are not required for future investment to be paid out as a final dividend to the shareholders. For the dividend to be legal, the company’s balance sheet must show that sufficient profits have been accumulated, net of any losses, to cover the amount of the dividend.
The directors’ decisions regarding the payment of a dividend should be recorded as a formal board minute, so if HMRC ever asks you can prove the legality and timing of the dividend payment. Sufficient profits will be proved by having either accumulated profits or interim accounts.
The company should also prepare a dividend voucher for each shareholder, showing the amount of dividend payable, the tax credit attached, and the payment date. The dividend may be paid by cheque or electronic transfer, or as an accounting entry to reduce your loan outstanding to the company.
However the dividend is paid, the accounting entries or payments should be completed as soon as possible after the decision to pay a dividend is taken. We can help you with this process, but it is important that the decision to pay the dividend is made well in advance of any cash being paid out of the company.