This information is targeted at small owner-managed companies. It is assumed that the owners do not have any children about to go to university, or already at university, for whom a student loan application is needed.
Many businesses incorporate themselves as a company in order to save tax, because corporation tax tends to be more lenient. Partly this is because there is an international market in corporation tax in which the State has to compete, and partly because income tax is to some extent a tax on consumption which corporation tax is not. A lower corporation tax bill means more money to reinvest in the business, with the prospect of future employees which the State is happy to support.
In order to get the full benefit of the lower corporation tax burden, the business owners need to consider extracting cash as dividends rather than salary. To declare a dividend the directors need to hold a meeting and vote on it, and that vote needs to be recorded as a minute. Many companies have just one director, who is able to hold a meeting with himself or herself just the same, as long as minutes of the meeting are kept.
Your accountant can help you with the formalities of preparing minutes of the meeting. In addition you will need to give each recipient of a dividend payment a tax voucher showing how much notional income tax has been deducted, and your accountant can also help you with this. We say notional income tax because actually it is corporation tax which has been paid on company profits, but this is shown as income tax on the voucher.
If you pay tax at the higher rate, then you will also need to pay extra income tax on any dividend distribution, so it can make sense to restrict the size of the dividend to keep you a basic rate taxpayer, which your accountant can advise on.
In many years you may decide to live frugally and do not require any dividend. Just the same, the formalities of a dividend should be undertaken and the dividend can be left as a credit on your director’s current account with the company rather than actually being taken out as cash. There may come a day when you need a lot of cash all in one go, and you can anticipate this by building up a large credit balance on your director’s current account using dividends.
Note that after you have paid corporation tax, then as long as you restrict dividends to keep you a basic rate taxpayer, there is no further tax to pay. However if you fail to pay a dividend, and then in a future year you take out a lot of cash, then you will be paying tax at the higher rate, or surtax, which defeats the point of setting up a company. Consider declaring a dividend every year, and don’t make a free gift to the taxman!