Directors’ Duties

Companies House, and in particular The Companies Act 2006, set out the obligations and responsibilities of directors. These are commonly referred to as the “Directors’ Duties”. When you are appointed as a director of a limited company, Companies House normally sends you a letter like this:

example Companies House letter

Please take time to read the letter and examine the details carefully. As accountants, we are perfectly aware of the directors’ duties and expect all clients to be in the same position. There is a duty to always act in the best interest of the company. That’s not the same thing as you own personal best interest.

In particular, there is a duty to exercise reasonable care, skill and diligence as set out at s.174:

(1)A director of a company must exercise reasonable care, skill and diligence.

(2)This means the care, skill and diligence that would be exercised by a reasonably diligent person with—

(a)the general knowledge, skill and experience that may reasonably be expected of a person carrying out the functions carried out by the director in relation to the company, and

(b)the general knowledge, skill and experience that the director has.

You can avoid a lot of aggravation with your own customers and suppliers (and with your accountant) if you follow the directors’ duties. Most importantly, it is the director who is responsible in law for submitting accounts and tax returns on time. In law, it is not the accountant. We help you to meet your directors’ duties. And you need to exercise reasonable care, skill and diligence in providing us with the right material in a timely manner. Thanks!

Can I move my limited company?

In the UK, there are three different legal systems which operate in Scotland, in Northern Ireland, and in England & Wales. That means that your company registered office, once formed and resident in one of those three, has to remain in that same jurisdiction forever. Moving within the same jurisdiction presents no problem.

However, you cannot (for example) move a company’s domicile from Scotland to England. That leaves two possible options to manage a change of location like that:

  • Incorporate a new company in the new jurisdiction, and dissolve the old company. That will also mean getting a new bank account and (if relevant) doing a new application for VAT registration.
  • Maintain a registered office facility in the old jurisdiction, and establish a trading address in the new one.

In either case, there is some admin to do. The first option may prove a little tedious as you explain to the bank and to the VAT office about the new business and your addresses for the last 3 years. The second one means paying a business for an accommodation address. There are dozens of companies who will provide that service, though some are better at mail handling than others.

The whole issue of a change of jurisdiction is a strategic management decision, and not an accounting matter. Hence we are unable to offer a recommendation.

Why does the tax year end on 5 April?

Are you ready for a history lesson?

Well, the short answer to “why does the tax year end on 5 April?” is that three things conspired to act together:

• In the old days, agriculture was the dominant business in Great Britain and “the year” revolved around sowing, tending, harvesting and preserving.
• So, traditionally (and until 1752) the tax year in Great Britain started on 26 March (the old “New Year’s Day”) and ended on 25 March.
• Then along came Pope Gregory XIII who for pragmatic reasons, wanted to score a point off Julius Caesar.

Perfectly clear, no? Pope Gregory did stuff in 1582 and it took Great Britain until 1752 to catch on. Let’s have a look at the long answer!

In the really old, old days, few people travelled far from home and calendars and clocks were not particularly important, the natural rhythm of life was tied to the natural rhythm of the seasons, and the variable amounts of daylight. Unless of course you were a Roman soldier! Building massive empires needs some coordination after all!

The Roman Civic calendar had been in place for as long as anybody could care to remember, and it’s origins were pretty obscure anyway. It was also inaccurate. By about 48 BC Caesar and his wise nobles were becoming increasingly troubled by the fact that the solar year and the Roman Civic calendar were becoming increasingly out of step. According to the astronomer Sosigenes it was three months out of step to be precise! They worked out that the solar year was 365 ¼ days long and they created the new Julian calendar, introducing the leap day for the first time. It wasn’t on 29 February though. It was decreed that every four years there will be two consecutive days called 23 February. Naturally!

Problem solved!

But it wasn’t!

To get things back into line, Caesar arranged for the year 46 BC to have 445 days! And because calendars and clocks were not particularly important to anybody but the military, it wasn’t until the year 8 BC that the new Julian calendar was widely adopted across the Roman Empire. The problem though, was that Sosigenes had overestimated the length of the solar year by 11 minutes and 14 seconds.

Then along came Pope Gregory and his nobles in the 1500s, and they spotted that this wonderful new Julian calendar was out of step with the solar year by about 10 days! A perfect excuse to put things right and to get your name in the headlines for ever more. The Gregorian calendar was established in 1582 when 4 October was immediately followed by 15 October.

Except that some parts of Europe (and beyond) were not prepared to take orders from a Catholic Pope, and so the Protestant and Orthodox countries (and others) did not follow suit. Even to this day, the dates of Easter vary between countries, according to their religious preference for the Julian calendar, the modified Julian calendar, or the Gregorian calendar! What a harmonious planet we live on!

In 1582 Austria, Spain, Portugal, Italy, Poland, and the Catholic states in Germany ended up out of step with the rest of Europe by 10 days. Gradually other countries came into line (because the astronomers were right, not because the Pope was right) and Great Britain made the switch a mere 170 years late, in 1752.

Turkey became the last European country to officially switch to the new Gregorian calendar, on 1 January 1927. Just 345 years after Italy did it.

Now go to present day Ethiopia and see how they have a 13 month calendar and a 12 hour day! One hour of Ethiopian time is not the same as one hour of Western time. One hour of Ethiopian time today is not even the same as one hour of Ethiopian time yesterday. The day starts at dawn and ends at dusk, and regardless of its length the day is split into 12 equal hours. They call new year’s day Enkutatash and it happens on either 11 or 12 September (on the Gregorian calendar).

But enough of this banter! You haven’t answered the question! Why does the tax year end on 5 April?

Well you were warned, it’s a long answer!

In Britain The Calendar (New Style) Act 1750 brought things into line with most of Europe, and that meant that 1752 was going to be a short year. Wednesday 2 September 1752 was followed immediately by Thursday 14 September 1752.

a calendar of Aug Sep Oct 1752 where September had 11 days missing

The problem was the uproar at The Exchequer, because they wanted a full year’s worth of tax to play with. And that’s when the end of the tax year moved from 25 March to 4 April. The Exchequer had a full 365 days’ worth of tax.

And that kept them happy until 1800.

Even though 1800 should have been a leap year, the Gregorian calendar decreed that 1800 was not a leap year owing to Sosigenes and his 11 minutes and 14 seconds miscalculation. Clawing back one day from 1800 compensated for centuries of getting pesky Julian calendar interference stuck in the magnificent Gregorian calendar precision.

But oh no! British civil servants being British civil servants were not standing for that! Losing one day of tax revenue! Hence, the end of the tax year was moved again, from 4 April to 5 April.

And there you have it, that is why the tax year ends on 5 April.

Practically every other country in the world has adopted the calendar year as their tax year. Even Ireland did that, in spite of the legacy 5 April date which the newly formed Republic of Ireland had inherited from the British system.

Why won’t Britain adopt a calendar year based tax year? You guessed it! British civil servants being British civil servants won’t stand for that!

How does the tax year affect you?

Limited companies

For limited companies, the financial year runs from 1st April one year to 31st March the following year. This is the date that the government typically sets new tax rates and rules to start on – for example, a new corporation tax rate may begin on 1st April in any given year.

The accounting year end is the date that a limited company chooses to prepare its accounts to every year. It runs from the day after the previous accounting year end to the next accounting year end. Many limited companies, but not all, choose 31st March for their accounting year end so that their accounting year matches the financial year.

The date you choose to begin your accounting year will affect when you pay tax on your profits, as companies pay tax nine months and a day after their accounting year end. For example, if you prepare your company’s accounts to 31st December each year, Corporation Tax will be due by 1st October.

Sole traders & partnerships

For sole traders, partnerships and individuals working for a company, the tax year, also known as the fiscal year, runs from 6 April one year to 5 April the following year.

Many sole traders, but not all, choose 5 April for their accounting year end so that their accounting year will match the tax year. By concession from HMRC, a sole trader who chooses 31 March for their accounting year end is also treated as having an accounting year that matches the tax year.

Director shareholder payments 2024/25

This is a basic guide to the small salary big dividend method of rewarding yourself from your own company for the tax year ended 5 Apr 2025. If your company is only one of your income sources, alongside significant investment income, or a PAYE salary elsewhere, then you will need a tailor made strategy.

Let’s assume that your company is your main income and the other sources are relatively trivial. Your company is responsible tor maintaining a corporation tax reserve. Dividends can only be paid from the company’s post tax profit, so that means that the company tax reserve must stay in the company.

If you have no profit, then you can pay no dividend. Take care not to pay dividends out of investor funding, bank loans or your company tax reserve. Investor funding and bank loans are not “profit”. Your company tax reserve is not “distributable profit”.

When most of your income is from dividends then you will need a personal income tax reserve as well. Keep corporate stuff corporate and personal stuff personal. Maintain two tax reserves properly and then you’ll never get a shock when it’s tax payment time.

Follow this system precisely. Ensure bank transactions between your company bank account and your personal bank account follow this system accurately. If it’s not right then HMRC may decide that PAYE tax and National Insurance is due on all of your personal income. You definitely do not want that to happen.

For this process to be legitimate you must be a director/shareholder of a UK limited company.

Your salary is paid to you for the responsibility involved in “holding the office of director” and not for “work done”. It must be a separately identifiable bank transaction, and should be paid at the end of every calendar month.

All shareholders must receive dividends in direct proportion to their shareholding.

Beware of adverse consequences if you decide to take 100% of the dividend when you are not the 100% shareholder.

Other than salary, describe these amounts as “drawings” until the overall tax picture for the year is clear. The “dividend” is calculated later. Separate bank transfers are required in order to distinguish salary from drawings. In most cases that means setting up 4 separate payments at end of every calendar month. As Proactive does not hold any authorities on client bank accounts, it’s up to you to make the correct transfers at the correct time.

Basic rate taxpayers

For people whose monthly income does not exceed 4,188.

Basic rate taxpayers year ended 5 Apr 2025
Monthly figures
Salary 758
Primary “Tax Free” drawings (personal allowance) 289
Secondary “Tax Free” drawings (dividend rate band) 41
Tertiary drawings (max) liable to 8.8% tax 3100

Provided always that the monthly income does not total more than 4188
Put aside 8.8% of your tertiary drawings as a personal tax reserve.

Higher rate taxpayers

For people who need (and can afford) monthly incomes between 4,188 and 8,333.

Higher rate taxpayers – 40% year ended 5 Apr 2025
Monthly figures
Salary 758
Primary “Tax Free” drawings (personal allowance) 289
Secondary “Tax Free” drawings (dividend rate band) 41
Tertiary drawings liable to 8.8% tax 3100
Supplementary drawings (max) liable to 33.8% tax 4145

Provided always that the monthly income does not total more than 8333
Put aside 8.8% of your tertiary drawings as a personal tax reserve.
Also put aside 33.8% of your supplementary drawings as a personal tax reserve.

Top rate taxpayers

For people who need (and can afford) monthly incomes in excess of 8,333.

There are graduated changes for annual incomes between 100,000 and 125,140 and the 45% rate of income tax also kicks in.

Top rate taxpayers – 45% year ended 5 Apr 2025
Monthly figures
Salary 0
Primary “Tax Free” drawings (personal allowance) 0
Secondary “Tax Free” drawings (dividend rate band) 41
Tertiary drawings liable to 8.8% tax 3100
Supplementary drawings (max) liable to 33.8% tax 5192

Additional drawings liable to 62.0% tax excess over 8,333.00
Put aside 8.8% of your tertiary drawings as a personal tax reserve.
Also put aside 33.8% of your supplementary drawings as a personal tax reserve.
And put aside 62.0% of your additional drawings as a personal tax reserve, because the personal allowance is withdrawn and that artificially creates an effective rate of tax of more than 60%.

For an independent view of this strategy have a look at this Unbiased report.

Find out more about dividend vouchers on this web site.

Is this legal?

Yes.

Lord Tomlin stated in the case of IRC vs Duke of Westminster (1936) 19 TC 490 every man is entitled, if he can, to order his affairs so that the tax attaching under the appropriate Acts is less than it otherwise would be.

The key thing is to keep this system in “order” and in compliance with the various Taxes Acts. If you deviate from the guidance above then you may find that your tax planning is not legal.

The Universal Problem Solving Technique

Wouldn’t it be nice if you could have a Universal Problem Solving Technique which could help you solve any problem?

Yes, we think so too.

So at Proactive Towers in 2005, we set about building a Universal Problem Solving Technique (UPST). It’s a constantly evolving set of documents and we realise that our version of the UPST is not the same one that everybody needs. It’s simply the UPST that works best for us.

There are probably as many UPSTs as there are businesses on the planet. That shouldn’t stop you from building and using your own. It improves efficiency and it helps speed up your processes. That leads to increased profits.

Here are a few insights into ours to help you get started.

The Universal Problem Solving Technique starts with a set of approximately 10 flowcharts, and is backed up by a knowledge base which runs to over 500 articles. It didn’t all happen in one day!

a deliberately blurred image of ten flowcharts

Decades later, various bits of this massive edifice are tweaked on a regular basis. The world changes, life changes, and our UPST changes. Regular work does not require a check of the core UPST. The core is used when some delicate matter needs attention. It’s the lubricant which reduces friction when dealing with customers, suppliers, staff and assets.

  • How do we respond to (our customer) Fred?
  • How do we respond to (our supplier) Wilma?
  • How do we handle (our employee) Barney?
  • How do we handle the failure of (our equipment) Betty’s laptop?

Imagine that you own an old second hand car. At some point you’re going to dispose of it, because the repeated cost of maintenance and repairs outweighs the utility of keeping it. The UPST addresses that. It’s both an art and a science, and we’re trying to build a systematic and useful tool which minimises wasted time and money. Is that something that interests you?

A  sample of the flowcharts was presented at the DDD North conference in 2022. It starts with a “Pioneer” flowchart which determines the route to be taken through the UPST. That quickly leads to a further flowchart related directly to the problem at hand. The “business” flowchart is illustrated below. This particular flowchart is the one which applies when you are the proprietor of the business. There are different flowcharts when the business in question is not your own.

In business, having the right information to hand helps with decision making. Hence this flowchart starts by referring you to a 1988 advert by a company called Informix. In the days before the web (and back when scanners were low quality) we saw this in a newspaper and kept a copy. It shows a black and white street map of central London, with half of the road names missing, and boldly proclaims:

Incomplete information will get you precisely nowhere

A black and white street map of central London, with half of the road names missing, this is a scanned image from an advert which Informix placed in the UK press in 1988 in the days before the web, and back when scanners were low quality

In order to even start addressing your problem you may need to ask your counterpart to provide more information. We sometimes end up having to do a bit of forensic accounting, and we sometimes dismiss a client. It all depends on how much information we can gather.

It’s also important to discuss the perennial “why” question. The sort of thing that the average 3 year old will repeatedly ask. All the staff at Proactive Towers are familiar with this story.

The perennial “why” question

The ultimate answer to a series of “why” questions is always:

“sub-atomic particle physics”

After a few authentic questions and responses, the answer eventually becomes “sub-atomic particle physics”. That same answer is then given repeatedly, until one of the participants gets bored or dies.

Assuming that you now have adequate information, do you still need to use the UPST? If you do, then it guides you to your solution. Here is the promised extract of the “business” flowchart. It’s been drafted to help with our internal business affairs, and also to help our coaching clients run their businesses. That explains why some bits have interesting questions, and why some bits are redacted. Note also that all clients are graded from A to D.

Occasionally, you may start with the “Pioneer”, follow a route through one or more additional flowcharts, consult the knowledge base, and learn that there is no ready made solution to help you. You end up at the opposite end of the UPST to the “Pioneer” flowchart and find yourself at the aptly named “Solutioneer” flowchart. Yes, you’ve guessed it! It’s a process that tells you how to build a new process and to either add it to the knowledge base, or modify the flowchart(s), or both.

That’s why the UPST is a constantly evolving set of documents!

Paul is also a business coach. Would your business like a helping hand?

Who wants to pay One Million in tax?

Imagine you have walked into some sort of business seminar, and the presenter starts with the question:

“Who wants to pay One Million in tax?”

And before anybody can reply, immediately answers the question by saying:

“I do!”

What’s going on?

Well, think about it. How much money would you need to earn in order to have a tax bill of one million? And if you were earning that much, do you think you would be troubled by your one million tax bill? Probably not. You’d probably be able to survive on the money that you have left over after the tax is paid. If not, you might in any case have sufficient drive to go out and earn some more money. So that (at some point) you’ll find yourself in the fortunate position of not having to worry about a scarcity of money in spite of your big tax bills.

That’s where you want to be. And how are you going to get there?

What you want to be doing is generating more sales and more profit. You’ll be wasting your time if your primary focus is on getting your tax bill down.

Instead, get your profit up, and face the fact that we all have to pay tax.

How will you increase your sales and your profits? You need a business plan. Here’s some revelationary early thinking on business plans, originally written in antiquated French by Henri Fayol, and translated into equally amusing old fashioned English by Constance Storrs. It’s worth a read both for the advice is gives, and for the way that it gives it.

Fayol recommends that you rewrite your plan annually. His advice still holds good today.

a generic picture of a Frenchman from the early 1900s

Compiling the annual plan is always a delicate operation and especially lengthy and laborious when done for the first time, but each repetition brings some simplification, and when the plan has become a habit, the toil and difficulties are largely reduced. Conversely the interest it offers increases. The attention demanded for executing the plan, the indispensable comparison between predicted and actual facts, the recognition of mistakes made, and successes attained, the search for means of repeating the one and avoiding the other, all go to make the new plan of work of increasing interest and increasing usefulness.

Also by doing this work, the personnel increases in usefulness from year to year, and at the end is considerably superior to what it was in the beginning. In truth, this is not due solely to the use of planning, but everything goes together. A well thought out plan is rarely found apart from sound, organisational, command, coordination, and control practices. This management element exerts an influence on all the rest.

Lack of sequence in activity and unwarranted changes of course are dangers constantly threatening businesses without a plan. The slightest contrary wind can turn from its course a boat which is unfitted to resist. When serious happenings occur, regrettable changes of course may be decided upon under the influence of profound but transitory disturbance. Only a program carefully pondered at an undisturbed time permits of maintaining a clear view of the future and of concentrating maximum possible intellectual ability and material resources upon the danger.

It is in these difficult moments above all that a plan is necessary. The best of plans cannot anticipate all unexpected occurrences which may arise, but it does include a place for these events and prepare the weapons which may be needed at the moment of being surprised. The plan protects the business not only against undesirable changes of course which may be produced by grave events, but also against those arising simply from changes on the part of higher authority. Also, it protects against deviations, imperceptible at first, which end by deflecting it from its objective.

The timid are tempted to suppress the plan or else whittle it down to nothing in order not to expose themselves to criticism, but it is a bad policy even from the point of view of self interest. Lack of plan, which comprises smooth running, also exposes the manager to infinitely graver charges than that of having to explain away imperfectly executed forecasts.

What does your business plan say? You don’t have a plan?

How does not having a plan help you?

If your focus is on tax reduction, then you’re trying to make the tail wag the dog. The General Anti-Abuse Rule (the GAAR) was introduced more than 10 years ago to counter anything which is not based on sound business principles. Whatever clever wheeze you’re thinking of won’t work. Sound business principles do work.

Artificially manipulating things to get your tax bill down will fall foul of s.207(1) & (2) Finance Act 2013. And the penalties under the GAAR can be as much as 60% of the missing tax, on top of  paying the missing tax itself. If you’re a 40% taxpayer that’s like asking to pay 64% instead. For example:

tax on hidden income 100 x 40% = 40.00
penalty on missing tax 40 x 60% = 24.00
total 64.00

So, rather than waste time on measures to antagonise the tax man, please spend some time on something which will really make a difference. Would you like to have enough income to not worry about paying tax of one million?

The state pension

We need your help to record your pension income correctly on your self assessment tax return.

Not everybody gets the same amount of state pension. There is a standard rate and a basic rate. You might get more (an enhanced rate) or less (a reduced rate) or something in the middle (a proportionate rate) and it all depends on how your national insurance and tax credits have been handled since you were 16 years old. In most cases the records go back over 50 years of your working life!

Roughly 3 months before you reach state pension age, the government will notify you of the amount you’re due by using a simple letter. The letter is important and we need a copy.

There is no form P60, nor any other year end document, so this letter is the only way that we know what your year one entitlement is.

In later years, at the end of each March, you should receive a similar letter explaining how much the pension will increase by. This letter is also important and we need a copy. Without these documents your precise figures cannot be determined.

If you don’t have this sort of letter within a month of the normal issue date, then please write (quoting your national insurance number) to . . .

The Pension Service
Post Handling Site A
Wolverhampton
WV98 1AF

. . . or telephone 0800 731 7898.

If you’ve not yet reached retirement age you can still check your State Pension forecast here. You’ll need a personal Government Gateway account in order to do this.

https://www.gov.uk/check-state-pension

Do not be on fire

Do not be on fire, AKA “getting to grip with things”.

Have you ever cooked anything on a camp fire? And have you ever cooked anything in a microwave oven? They’re basically the same thing, but they do the same thing very differently, and they require vastly different levels of care, skill and maintenance. The microwave oven does the challenging stuff for you. However, handle a camp fire badly and you are going to get burnt, and possibly burn others too. The camp fire also takes time and effort to set up correctly, and to decommission safely.

That’s a useful analogy for what it takes to be a company director, compared to being a regular employee. If you do not comply with the directors’ duties in the Companies Act then (metaphorically) you are going to get burnt. Whereas an employee might only risk a (metaphorical) slap on the wrists.

At Proactive, when we’ve worked with new clients for a number of months, we sometimes have to remind them of their duties and obligations. The email can vary in severity, and it usually starts like this:

“I would be failing in my duty as an accountant if I didn’t tell you this now. And, it’s better that you hear it from me now, rather than hear it from HMRC after a few more years of doing the same thing. Nobody wants to end up in court arguing with HMRC or a supplier or a business partner.”

The middle of the email is tailor made to explain some of the concerns we have as professional accountants. It’s factual, it’s not emotional. And it stresses that we ourselves are company directors who comply with the directors’ duties. Hence, we are complying by telling errant directors that they also need to comply.

Usually this “get a grip” email ends with the standard dialogue below, though it sometimes changes depending on the circumstances:

“Your first duty is to act in the best interests of the company and for the benefit of its stakeholders as a whole. The company bank account is not your personal piggy bank. You and your company are not the same thing. I recommend that you read about directors’ duties in sections 170 – 177 of The Companies Act 2006

 http://www.legislation.gov.uk/ukpga/2006/46/contents

Please look closely at s172.1(c) and 172.1(e).

Where s.173 says “independent judgment” it means that you need to step away from the business and look at it from the outside as an independent observer. As this mythical independent observer, do you think that the interaction between the company (one legal entity) and the director (a separate legal entity) all comply with s.172.1(e) where is says “maintain a reputation for high standards of business conduct”?

Take the weekend to think this all through, it’s time to get a grip on being a business director, and then let me know what would be a good next step.”

So if you’re leaving the world of employment to work as a contractor through your own limited company, it’s not as straight forward as operating a microwave oven. It’s more like cooking on a camp fire. It’s not a walk in the park, it’s a fire, and you are legally required to get a grip!

Engineers and software developers will know about rule zero . . .

A poster from HackSpace Nottingham which looks like a traffic sign. A person is running away from a fire, the border has a large red circle, with a large red diagonal line. Beneath the circle, in big bold capitals it says DO NOT BE ON FIRE. The poster is edged with black and yellow tape, commonly used to fence off danger.

Rule 0 – Do not be on fire!

Director shareholder payments 2023/24

This is a basic guide to the small salary big dividend method of rewarding yourself from your own company for the tax year ended 5 Apr 2024. If your company is only one of your income sources, alongside significant investment income, or a PAYE salary elsewhere, then you will need a tailor made strategy.

Let’s assume that your company is your main income and the other sources are relatively trivial. Your company is responsible tor maintaining a corporation tax reserve. Dividends can only be paid from the company’s post tax profit, so that means that the company tax reserve must stay in the company.

If you have no profit, then you can pay no dividend. Take care not to pay dividends out of investor funding, bank loans or your company tax reserve. Investor funding and bank loans are not “profit”. Your company tax reserve is not “distributable profit”.

When most of your income is from dividends then you will need a personal income tax reserve as well. Keep corporate stuff corporate and personal stuff personal. Maintain two tax reserves properly and then you’ll never get a shock when it’s tax payment time.

Follow this system precisely. Ensure bank transactions between your company bank account and your personal bank account follow this system accurately. If it’s not right then HMRC may decide that PAYE tax and National Insurance is due on all of your personal income. You definitely do not want that to happen.

For this process to be legitimate you must be a director/shareholder of a UK limited company.

Your salary is paid to you for the responsibility involved in “holding the office of director” and not for “work done”. It must be a separately identifiable bank transaction, and should be paid at the end of every calendar month.

All shareholders must receive dividends in direct proportion to their shareholding.

Beware of adverse consequences if you decide to take 100% of the dividend when you are not the 100% shareholder.

Other than salary, describe these amounts as “drawings” until the overall tax picture for the year is clear. The “dividend” is calculated later. Separate bank transfers are required in order to distinguish salary from drawings. In most cases that means setting up 4 separate payments at end of every calendar month. As Proactive does not hold any authorities on client bank accounts, it’s up to you to make the correct transfers at the correct time.

Basic rate taxpayers

For people whose monthly income does not exceed 4,188.

Basic rate taxpayers year ended 5 Apr 2024
Monthly figures
Salary 758
Primary “Tax Free” drawings (personal allowance) 289
Secondary “Tax Free” drawings (dividend rate band) 83
Tertiary drawings (max) liable to 8.8% tax 3058

Provided always that the monthly income does not total more than 4188
Put aside 8.8% of your tertiary drawings as a personal tax reserve.

Higher rate taxpayers

For people who need (and can afford) monthly incomes between 4,188 and 8,333.

Higher rate taxpayers – 40% year ended 5 Apr 2024
Monthly figures
Salary 758
Primary “Tax Free” drawings (personal allowance) 289
Secondary “Tax Free” drawings (dividend rate band) 83
Tertiary drawings liable to 8.8% tax 3058
Supplementary drawings (max) liable to 33.8% tax 4145

Provided always that the monthly income does not total more than 8333
Put aside 8.8% of your tertiary drawings as a personal tax reserve.
Also put aside 33.8% of your supplementary drawings as a personal tax reserve.

Top rate taxpayers

For people who need (and can afford) monthly incomes in excess of 8,333.

There are graduated changes for annual incomes between 100,000 and 125,000 and the 45% rate of income tax also kicks in.

Top rate taxpayers – 45% year ended 5 Apr 2024
Monthly figures
Salary 0
Primary “Tax Free” drawings (personal allowance) 0
Secondary “Tax Free” drawings (dividend rate band) 83
Tertiary drawings liable to 8.8% tax 3058
Supplementary drawings (max) liable to 33.8% tax 5192

Additional drawings liable to 62.0% tax excess over 8,333.00
Put aside 8.8% of your tertiary drawings as a personal tax reserve.
Also put aside 33.8% of your supplementary drawings as a personal tax reserve.
And put aside 62.0% of your additional drawings as a personal tax reserve, because the personal allowance is withdrawn and that artificially creates an effective rate of tax of more than 60%.

For an independent view of this strategy have a look at this Unbiased report.

Find out more about dividend vouchers on this web site.

Is this legal?

Yes.

Lord Tomlin stated in the case of IRC vs Duke of Westminster (1936) 19 TC 490 every man is entitled, if he can, to order his affairs so that the tax attaching under the appropriate Acts is less than it otherwise would be.

The key thing is to keep this system in “order” and in compliance with the various Taxes Acts. If you deviate from the guidance above then you may find that your tax planning is not legal.

Why are Dividend Vouchers Important?

A dividend voucher is a document given to shareholders of a business when the company declares a dividend to be paid out. They serve as evidence of payment and are also important for those completing self-assessment tax returns.

example dividend voucher – the appearance can vary

example dividend voucher

How does it work?

Officially a shareholders’ resolution is needed “to declare” a dividend, and a directors’ meeting is needed to establish when “to pay” a dividend. The shareholder and directors meetings can be one and the same meeting and the resolutions and decisions are recorded in the minutes of the meeting.

When a company declares a dividend, and it’s been formalised by the board, dividend vouchers can be prepared and sent to all those who will receive a payment.

The voucher normally includes the trading year it relates to, and is dated (at the top right) with the date it was paid. It states the share class it was declared on and, most importantly, the amount that was paid. The dividend may include a tax credit or a notional tax credit. Whether is does depends on tax law, and that can change from year to year.

This voucher is a shareholder’s evidence of a dividend payment, and they should retain it in their own records. This is particularly important for people who complete a self-assessment tax return, as they would need to declare dividend income on their return. Having a dividend voucher is an easy way of recalling the payment information. If there is an HMRC enquiry dividend vouchers are used to provide evidence of dividend income. Bank statements provide HMRC with evidence of the payment dates.

Companies are obliged to provided dividend vouchers to their shareholders if they are declared. If they do not do so, HMRC could deem payments out of the business accounts to be salary, and Tax/National Insurance would be due. It is the responsibility of the Company Secretary to produce these documents. If your company has no Company Secretary, and has not appointed a company secretarial bureau to do the work, then it is the responsibility of the Company Director(s) to prepare vouchers.

What should I do next?

Most companies declare dividends on a semi-regular basis (for example, once a month or once a quarter) or on an annual basis. You should decide which of these is best for your business, bearing in mind that dividends may only be declared from distributable profits.

Then, once the dividend has been declared and formalised, you should produce vouchers for each shareholder receiving a dividend payment and have this signed by a director and passed to the shareholders directly. It is recommended that companies also keep a copy of the dividend vouchers on file in case a shareholder needs a replacement copy.

If you have declared dividends in the past and have not produced vouchers, you may want to consider preparing some.

Footnote

A company’s Articles of Association typically set out the process for declaring dividends. The directors are responsible for ensuring that dividend payments are made at the right time. The text below shows Article 30 of the UK’s model articles of association for private companies limited by shares.

The Companies Act 2006 refers to “dividends” using the more expressive term “distributions”. We can treat those words as being  interchangeable. For a full guide please see s.829 – s.853 of The Companies Act 2006.

30. Procedure for declaring dividends 

(1) The company may by ordinary resolution declare dividends, and the directors may decide to pay interim dividends.

(2) A dividend must not be declared unless the directors have made a recommendation as to its amount. Such a dividend must not exceed the amount recommended by the directors.

(3) No dividend may be declared or paid unless it is in accordance with shareholders’ respective rights.

(4) Unless the shareholders’ resolution to declare or directors’ decision to pay a dividend, or the terms on which shares are issued, specify otherwise, it must be paid by reference to each shareholder’s holding of shares on the date of the resolution or decision to declare or pay it.

(5) If the company’s share capital is divided into different classes, no interim dividend may be paid on shares carrying deferred or non-preferred rights if, at the time of payment, any preferential dividend is in arrear.

(6) The directors may pay at intervals any dividend payable at a fixed rate if it appears to them that the profits available for distribution justify the payment.

(7) If the directors act in good faith, they do not incur any liability to the holders of shares conferring preferred rights for any loss they may suffer by the lawful payment of an interim dividend on shares with deferred or non-preferred rights.