Please read our guide to Bounce Back Loans, Dividends, and Illegal Dividends.
What is a Dividend?
A dividend is the apportionment of some of the earnings by public listed companies to their shareholders. A company’s board of directors determines the amount and the payment options for the dividends. You can draw a dividend if there is enough after-tax profit available or the Company has sufficient accumulated profit or reserves over previous years. Dividend payouts also directly relate to the increase or decrease in the Company’s share price.
How much tax do you pay on Dividend Income?
You won’t pay tax on dividend income up to your Personal Allowance limit. The dividend allowance for the tax year April 6, 2022, to April 5, 2023, is £2,000. The tax rate above the dividend allowance depends on the rate band in which your dividend income falls.
Band Taxable Income Tax rate
- Allowance Up to £2,000 0%
- Basic rate £2,000 to £50,270 8.75%
- Higher rate £50,271 to £150,000 33.75%
- Additional rate over £150,000 39.35%
Tax rates may be subject to change and may not apply to your situation. Thus visit gov.UK to learn more about updates on tax rates.
What is an Illegal Dividend?
As mentioned above, dividends can be drawn from accumulated funds and post-tax profit. But if there aren’t adequate funds to pay as dividends and the dividend paid suddenly creates a loss, it is known as “Illegal Dividend or Ultra Vires.” The director is responsible for monitoring if there are enough profits before a dividend is declared.
Suppose you find yourself in a position that may lead to paying an illegal dividend. In that case, you must consult your contractor accountant to convert the dividend payment into a loan you must repay to your Company.
How to check if there is enough money to draw out Dividends?
It is not as simple as looking at the Company’s bank balance. A specialist accountant can advise on how much can be paid as dividends, ensuring enough funds are left to pay the due expenses, bills and taxes.
Care must be taken to declare illegal dividends by the Company’s directors, though not considered a criminal offense. However, if you fail to take reasonable care before declaring the dividend, you may repay that dividend to the Company.
Bounce Back Loans Scheme
The Bounce Back Loan Scheme was introduced to enable those businesses that have suffered from the coronavirus to access finance easily and quickly. This scheme was closed to new applications on March 31, 2021.
BBL provided financial support through several accredited lenders and partners to the businesses across the UK that:
- They were adversely impacted due to the coronavirus outbreak and saw their cash flow disrupted
- Could you get back on track from the financial support of £50,000 or less
A lender could provide six-year term finance from £2,000 to £50,000 with an interest rate of 2.5%. The BBL (Bounce Back Loans) scheme ensured a full government-backed guarantee for any outstanding balance for capital and interest. However, the borrower remained fully responsible for the repayment of the debt.
Options available for repayment of BBLS
It would be best if you spoke to your lender about the repayment options available. The lender will then advise you on various payment options according to the borrowing you have with them. The lender may also highlight several opportunities for PAYG (Pay as You Grow). PAYG helps businesses manage their cash flow problems and have appropriate time to get back to growth.
The following options are available for businesses that have taken out Bounce Back Loan.
Ask for an extension in the credit period from six to ten years without increasing the interest rate.
- Reduce the monthly repayments to interest payments only (for six months). The businesses can avail of this option up to three times during the loan term.
- Take a repayment break for up to six months, once during the BBL term.
Risks associated with Bounce Back Loans
The attractiveness of the Bounce Back Loan is doubtless – easy repayment terms and low-interest rate – but the restrictions to its use are clear and should not be breached in any way.
The loan amount should only be used for commercial purposes, which bring economic benefits to the business, and cannot be used for personal purposes, including the Director’s Loan.
Bounce Back Loan cannot be used to pay illegal dividends, which means you cannot pay dividends when there are insufficient funds.
However, legal dividends can be made using the loan amount.
Likewise, you can pay salaries through Bounce Back Loans, an allowable business expense, although this may have tax implications and NIC.
Corporation Tax on Director’s Loan
If you are a company director and take a director’s loan, your Company will be liable to pay corporation tax at 32.5% of the original loan amount. Once you have repaid the loan, your Company can reclaim the corporation tax, but you cannot claim the interest paid on loan.
Personal Tax on Director’s Loan
If you owe a Director’s Loan of more than £10,000 at any time a tax year, your Company must treat the loan as ‘benefit in kind’ and deduct Class 1 National Insurance. If you pay your company interest on the loan at HMRC’s official interest rate of 2% (from April 1, 2021), you can prevent extra personal tax implications and NIC. But if you pay interest below the official rate, your Company must record the interest as company income and treat the interest discount as a ‘benefit in kind.’ You must include the interest payment on the personal Self Assessment Tax Return.
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