Dividends are generally the most tax-efficient form of income you can take from your company but they can only be paid out of profits. Despite this, might there be a way for your loss-making company to pay you a dividend?
Income or profit extraction
As a company owner-manager, the usual tax planning advice you’ll receive is to take a modest salary and the remainder of your income needs as a dividend (also referred to as a distribution). This is generally good advice but it’s not always possible to follow it.
When a dividend can’t be paid
Company law only allows dividends and other distributions to be paid to shareholders when the company has reserves, i.e. accumulated profit.
If your company has a bad run and makes losses these will eat into its reserves and limit its ability to pay a dividend or prevent it entirely. If you need cash income from your company, but it can’t be a dividend, the only alternative is salary; but this comes with hefty extra tax and NI costs.
Tax-efficient alternative
Rather than all cash salary a company, might be able to enter into arrangements whereby it was billed for services or goods which the owner would normally settle personally.
Such arrangements would count as taxable benefits in kind. This would save the owner NI equal to up to 8% of the value of the bills that the company settled.
That’s helpful, but in practice there’s limited scope for such arrangements as the owner will need cash to pay his mortgage and other debts that can’t be transferred to his company.
Company share capital can be converted into reserves which can then be paid as dividends.