Dividends, Shares & Company Structure FAQs

Salary:

·   What it is: Regular payment made by an employer to an employee or director.

·   Tax Implication: Subject to Income Tax and National Insurance Contributions (both employer and employee parts).

·   Benefits: Contributes towards your state pension and benefits entitlements.

Dividends:

·   What it is: A share of the company's profits, distributed to shareholders.

·   Tax Implication: Subject to Dividend Tax, which can be lower than Income Tax rates. No National Insurance is due on dividends.

·   Benefits: Might be tax-efficient for higher or additional rate taxpayers.

Comparison:

1. Tax-Efficiency: Dividends might offer a more tax-efficient way of taking money out for some, especially if you can utilise the Dividend Allowance and basic rate tax band.

2. State Benefits: Taking a salary, even if it's just up to the National Insurance threshold, means you're paying into the system, which can affect your entitlement to state benefits, like the state pension.

3. Company's Perspective: Salaries are an expense and reduce the company's Corporation Tax, while dividends are paid out of post-tax profits.

4. Flexibility: Dividends offer flexibility since you can decide when to take them and how much, based on company profits.

5. Other Considerations: If you're considering borrowing money, such as getting a mortgage, a consistent salary might be looked upon more favourably by lenders than dividends.

In Summary:

The best approach often involves a combination of both salary and dividends. 

Many directors choose to take a small salary up to the National Insurance threshold and then supplement this with dividends to maximise tax efficiency. However, individual circumstances vary, so it's essential to review your personal situation, company profitability, and future plans. Seeking advice from an accountant can ensure the best strategy for you and your business.

1.     Dividend Tax: This is a tax on the income you receive from owning shares in a company. Dividends are a portion of the company's profits shared with its shareholders.

2. Tax-Free Dividend Allowance: Every individual has an annual tax-free dividend allowance. This means you can earn a certain amount in dividends each year without having to pay any tax on them.

3. Tax Bands: Once you exceed the tax-free dividend allowance, the amount of Dividend Tax you pay will depend on your overall taxable income. Dividend Tax has its own tax bands:

·   Basic Rate: For those whose total income falls within the basic rate tax band.

·   Higher Rate: For those whose total income falls within the higher rate tax band.

·   Additional Rate: For those with income above the higher rate threshold.

4. Reporting and Payment: If the dividends you receive exceed your tax-free dividend allowance and you need to pay tax:

·   If you fill out a Self Assessment tax return, report the dividends there.

·   If you don't usually send a tax return, you need to contact HMRC.

5. ISAs: Dividends received within an ISA (Individual Savings Account) are tax-free, and you don't have to pay Dividend Tax on them.

6. Pension Funds: Dividends received within pension funds are also tax-free.

It's always a good idea to consult with a professional accountant or tax advisor to ensure you're in compliance and understand your specific tax obligations.

Companies often issue shares to raise capital. However, not all shares are the same. 

Companies can have different types of shares, each with its own set of rights and benefits. 

Let's break this down simply.

1. Why Have Different Types of Shares?

Different types of shares allow companies to offer varied rights to different groups of shareholders. This can be useful in controlling who has decision-making power, who receives dividends, and in various other aspects of company management.

Common Types of Shares:

·   Ordinary Shares: These are the most common type of shares. Holders usually have one vote per share and get dividends, but the amount isn't fixed. Different classes can be issued – such as “A” Ordinary, “B” Ordinary etc – and, although these may have exactly the same rights as other Ordinary shares, they are treated as if they were a different type of share.

·   Preference Shares: Holders of these shares get their dividends before ordinary shareholders. The dividend is usually a fixed amount. They might not have voting rights, or their voting rights might be limited.

·   Cumulative Preference Shares: If the company can't pay dividends one year, holders of these shares are 'first in line' the next time dividends are paid.

·   Redeemable Shares: These shares are issued with the understanding that the company will buy them back at a future date.

·   Non-voting Ordinary Shares: Just like ordinary shares, but without the right to vote at general meetings.

Why Issue Different Types of Shares?

·   Flexibility: Different shares can be offered to different investors based on their preferences and risk tolerance. Different classes of shares are often used to enable differential dividends to be taken between the classes.

·   Control: It allows the original owners to maintain control. For example, they can issue non-voting shares to investors, so the original owners still make the key decisions.

·   Incentives: Companies can use certain share types, like redeemable shares, to incentivise employees or directors.

·   Fundraising Strategy: Different shares can be used to appeal to different types of investors. Some might want the priority of preference shares, while others might be okay with the risk and potential rewards of ordinary shares.

In Summary:

Think of shares as slices of a cake (the company). While every slice comes from the same cake, they can be of different sizes, have different toppings, or come with different benefits. In the same way, a company's shares can come with various rights and benefits, depending on the company's goals and the needs of its shareholders.

Yes, your family can hold shares in your company . However, keep in mind:

1. Control: The distribution of shares determines control of the company. Ensure you're comfortable with how much control each shareholder has.

2. Tax Implications: There might be tax benefits or implications, depending on how dividends are distributed to family members.  In particular, issues may arise in issuing shares to your minor children.

3. Transfer of Shares: If you decide to give or sell shares to family, there are procedures to follow and potential tax implications.

4. Shareholders' Agreement: It's a good idea to have an agreement in place, outlining the rights and responsibilities of each shareholder, especially in a family-run business to prevent disputes.

It's advisable to discuss with an accountant or legal expert to understand the best structure and any implications.

If you are the sole shareholder (or jointly with your spouse), there is generally no need to pay interest.  Additionally, the tax payable by you on the interest received might be higher than the tax relief available to the company depending on the particular circumstances.

If there are other shareholders in the company, or if other individuals have made loans to the company, it might be appropriate to pay interest to ensure that there is equitable treatment of all parties.

If it is decided that interest should be paid, consideration should be given to having a written loan agreement particularly if third parties are involved.

Generally, a company is required to deduct income tax at source at 20% from interest payments made and this tax would be treated as a payment on account of your other tax liabilities.

Companies can lend money to shareholders and directors, but there are certain rules and tax implications to consider. Let's break it down:

Lending Money:

Circumstances: A company can lend money to a director or shareholder at any time, but there are rules about the interest charged and tax implications based on the amount and duration of the loan.

Tax Consequences:

For the Company:

Corporation Tax: If the loan is not repaid within nine months of the company's year-end, the company may have to pay an additional 33.75% of the loan amount as Corporation Tax (this is known as the 'Section 455 charge'). This is potentially repayable, but only when the director/shareholder repays the loan.

Benefit-in-kind: If the company does not charge interest, or charges interest below the official rate set by HMRC on the loan, it's considered a benefit-in-kind.

For the Director/Shareholder:

Benefit-in-kind Tax: If the company does not charge interest, or charges a rate below HMRC's official rate, the difference is treated as a benefit-in-kind for the director/shareholder. This means they'll have to pay additional Income Tax on this benefit, and the company will have to pay Class 1A National Insurance Contributions on the benefit value.

Repayment: If the director/shareholder doesn't repay the loan within the specified timeframe, they might be charged additional interest or penalties, especially if the company has to pay the Section 455 charge.

Lending Money to Shareholders in Close Companies:

Circumstances: If the company is a 'close company' (basically, a UK company controlled by five or fewer shareholders) and it lends money to a shareholder who is also an individual (not another company), additional rules apply.

Tax Consequences:

For the Company: The same Section 455 charge mentioned above applies.

For the Shareholder: If the loan exceeds £10,000 (or £5,000 in some cases), and no interest or below-market interest is charged, it's considered a benefit-in-kind, and the individual shareholder will need to pay Income Tax on the benefit.

Advice:

Loans to directors and shareholders can be complex and have tax implications if not handled correctly. It's essential for companies to document everything properly, have clear loan agreements in place, and understand the associated tax consequences. It's always advisable to consult with an accountant or tax professional when considering such loans.

Lending to a Family Member:

Circumstances: If a company lends money to a family member of a shareholder or director, especially in the context of a close company, it's treated similarly to a loan directly to the shareholder or director.

Tax Consequences:

For the Company:

Corporation Tax (Section 455 charge): Even if the loan is given to a family member of a director or shareholder, the company may still be liable to pay the 33.75% Section 455 charge on the loan amount if the loan isn't repaid within nine months of the company's accounting year-end.

For the Director/Shareholder:

Beneficial Loan Arrangements: If the loan to a family member is deemed to be made by reason of the director's or shareholder's connection to the company and exceeds £10,000 (or £5,000 in some cases), and if no or below-market interest is charged, then it is considered a benefit-in-kind for the director/shareholder, not the family member. This means the director/shareholder will have to pay additional Income Tax on this benefit, and the company will also have to pay Class 1A National Insurance Contributions on the benefit value.

For the Family Member:

If the family member is not also a director or shareholder, then they generally wouldn't face the same tax implications as the director/shareholder. However, if the loan has beneficial terms (e.g., no interest or low interest), it might still be considered as an indirect benefit to the director or shareholder, leading to the tax implications mentioned above.

Further Points to Note:

Avoiding 'Bed and Breakfasting': If a director/shareholder repays the loan to avoid the Section 455 charge and then takes out a similar loan shortly afterwards, HMRC might consider this as 'bed and breakfasting'. In essence, HMRC sees this as an attempt to evade the tax charge and might still levy the tax.

Written Agreements: It's essential to have a formal loan agreement in place, especially when lending to family members. This ensures clarity around the terms of the loan, interest rates (if any), and repayment schedules.

As always, the nuances and specifics of individual situations can vary, and tax laws can change. Thus, if a company is considering loaning money to a family member of a director or shareholder, it's advisable to consult with a UK tax professional or accountant to understand the full implications and ensure compliance.

When an employer grants shares or options to employees, different tax implications arise based on the specifics of the share or option scheme implemented. Here's a simplified overview:

1. Share Grants: If an employer grants shares to an employee, the value of those shares is typically considered taxable income. The employee is usually liable for Income Tax on the market value of the shares at the time they're received, minus any amount the employee pays for the shares.

·   Income Tax: The difference between the market value of the shares and what the employee pays (if anything) is treated as employment income, subject to Income Tax.

·   National Insurance: Both the employer and employee will likely be liable for National Insurance contributions on the value of the shares provided.

2. Share Options: If an employer grants an option to an employee, it means the employee has the right to buy a set number of shares at a fixed price after a defined period. The tax situation with options can be more complex and depends on the type of scheme.

·   Non-Tax-Advantaged Options: Generally, if the option is not part of a specific tax-advantaged scheme, the employee will owe Income Tax and possibly National Insurance contributions on the difference between the market value of the shares when the option is exercised and what they pay for them.

·   Tax-Advantaged Schemes: There are specific share option schemes (like the Enterprise Management Incentives (EMI), Save As You Earn (SAYE), Company Share Option Plan (CSOP), or Share Incentive Plans (SIPs)) that provide tax advantages. For these schemes, provided certain conditions are met, the employee may not have to pay Income Tax or National Insurance contributions when they receive the options or when they exercise them (buy the shares). However, Capital Gains Tax may apply when they sell the shares.

3. Selling the Shares: When employees eventually sell their shares, they may have to pay Capital Gains Tax on any increase in value. The taxable gain is typically the difference between what they receive when they sell the shares and what they paid for them, including any amount charged to Income Tax when they got the shares or options.

Given the complexity of tax legislation around shares and share options, and because rules can change, it's strongly recommended for both employers and employees to seek specific advice from a tax professional. They can provide guidance on the tax implications and reporting requirements to ensure compliance and help take advantage of any available tax reliefs.