Small Business Accounting Support

• What are dividends?
• Dividend tax rates and allowances
• Paying taxes on dividends
• Dividend FAQs

A dividend is money that's paid out by limited liability companies to investors, usually on a quarterly or annual basis. These payouts are based on the quarterly profits of your company as well as the amount of stock you own.

Dividends are calculated based on profits-what is left in your company after all expenses have been paid-not revenue.

Dividends can be either paid in cash or reinvested into your investment portfolio via dividend reinvestment, or via SCRIP dividends-which allow companies listed on the LSE to give investors additional shares instead of cash payouts.

Dividend tax refers to the rates by which those dividends are taxed according to HMRC. Each year, these tax rates may differ.

<p>As a <a href="https://www.goforma.com/knowledge-base/what-is-a-limited-company" target="_blank">limited company</a> director, you have greater flexibility to work around the tax system, and are able to implement <a href="https://goforma.com/tax" target="_blank">tax optimisation strategies</a> not available via other <a href="https://goforma.com/limited-company/sole-trader-vs-limited-company-vs-umbrella" target="_blank">business structures</a>. </p><p>One of these ways is to draw dividends from your company, as opposed to receiving a salary; doing so can help to reduce your tax bill.</p><p>If you're <a href="https://www.goforma.com/self-employed#how-to-start" target="_blank">newly self-employed</a>, this can be rather confusing. </p><p>You might be wondering: How can dividends help reduce my tax bill, and what taxes do I need to pay on them? Are there additional considerations I need to keep in mind?</p><p>These are the questions we'll be answering below:</p>

A dividend is a payment of profit that a limited company distributes to its shareholders. This is the money remaining after all business expenses and liabilities, as well as outstanding taxes (including VAT and Corporation Tax) have been paid off.

Dividends are important as they are a tax-efficient way to pay yourself from your limited company. Other than drawing dividends as income, you may also consider paying dividends into a pension fund, ISA or to family members.

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Tax season can be stressful for small business owners.

You don't have the convenience of having an employer filing for you. While there are all kinds of tips and strategies for managing your taxes, the first order of business is to get key deadlines noted on your schedule, and determine how and when to make your payment.

Here's what you need to know:

As a contractor running your own limited company, you need to be aware of the following deadlines:

• File end of year accounts to Companies House: 9 months after your company year ends. If it is your first year, the due date will be 21 months from the date your company was incorporated.
• File your confirmation statement: This is due on the anniversary of incorporation each year
• File your corporation tax return: This is due 12 months from your company year end.
• Pay your corporation tax bill: Payment is due 9 months and 1 day after the end of the company year
• PAYE RTI (Real Time Information) Returns: A submission of your company payroll has to be submitted in real time each month to HMRC. This is due on or before the intended salary payment. Any tax due from this can be payable on a quarterly or monthly basis as follows:
• the 22nd of the next tax month if you pay monthly
• the 22nd after the end of the quarter if you pay quarterly
• VAT returns: Usually submitted on a quarterly basis, the company VAT is due to be filed and paid within 1 month and 7 days from the quarter end.
• Self Assessment tax returns: Your Self Assessment Tax Return is always due to be filed by the following 31st January after the end of the tax year. This date is also the same deadline for payment of any tax due but you may also have a payment on account due by 31st July after this.
• P11D: The submission of the company P11D will need to made by 6th July with any payment of National Insurance arising due by 19th July (22nd if paid electronically)

You can change your company's year-end-otherwise known as the accounting reference date (ARD). Changes can be made to your current financial year or the year before.

Your company's financial year can be shortened as many times as you want, with the minimum duration you can shorten it by being one day. You can lengthen your company's financial year by up to 18 months once every five years. If [other conditions apply](https://www.gov.uk/change-your-companys-year-end#:~:text=You can change your company's,the one immediately before it.), such as if your company is in administration, you'll be able to lengthen your financial year more often.

If you're paying salaries to employees or directors, you need to register for PAYE and pay your PAYE bill to HMRC.

• Monthly payments: Your PAYE bill is due on the 22nd of the next tax month.
• Quarterly payments: Your PAYE bill is due on the 22nd after the end of the quarter.

There are various ways to make your payment.

• Same or next day payments: online or telephone banking, CHAPS
• Payments processed in 3 working days: card payments (online), Bacs, cash or cheque payments at your bank or building society, Direct Debit, by cheque through the post
• Payments processed in 5 working days: Direct Debit (if it's the first time you're setting up a Direct Debit payment)

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As a limited company director, there are several important deadlines you need to be aware of. These are:

• File your Self Assessment tax return: 31st January 2022 for the 2020/2021 tax year
• Pay you Self Assessment tax: 31st January
• Registering for VAT: Register for VAT within 30 days of meeting the conditions for [compulsory registration](https://www.gov.uk/vat-registration/when-to-register#:~:text=Compulsory registration,over the last 12 months)
• Filing and paying VAT returns: 1 month and 7 days after your VAT quarter end date
• Company accounts: First year accounts are due 21 months after incorporation. Subsequent accounts are due 9 months after the year end
• Corporation tax registration: You need to register within 3 months of trading commencing.
• File your corporation tax return: 12 months following the end of your accounting period
• Corporation tax payment: 9 months and 1 day following the end of your accounting period
• File your Confirmation Statement: You need to file a confirmation statement every 12 months, within 14 days after your confirmation date.

As a self-employed person or small business owner, getting a good grasp of accounting fundamentals can feel like an uphill task.

As accountants who specialise in small business needs, we're familiar with the challenges that you face-and have put together a series of articles to help you easily understand the basics of accounting.

We've touched on key accounting terms & concepts and the differences between bookkeeping and accounting. Below, we'll dive in to explain what debits and credits mean in accounting.

Whether you're self-employed or running a small business, you need to stay on top of your business finances.

While you can delegate your company's financial affairs to your accountant, it's still important to have a good grasp of the essentials-such as basic accounting terms and concepts. With this knowledge, you'll be better able to communicate with financial professionals, team members and potential investors.

To help you get started, we've written up an introductory guide to accounting terms you need to know:

Accounts payable (AP)

This refers to money owed to the business by its creditors (suppliers, vendors and other service providers). These are recorded as a liability on the balance sheet.

Accounts receivable (AR)-

This refers to money owed to the business by its debtors (clients and customers). The amounts are recorded as an asset on the balance sheet.

Accruals

Accruals are amounts that are unaccounted for at the end of the accounting period. These can be expenses that have been incurred or revenue that has been earned, but aren't yet recorded in the accounts.

Assets

Any resource that is owned by a company. There are two main types of assets: current assets and non-current assets. Current assets are expected to be consumed within a year, while non-current assets are expected to be held for longer than a year.

Balance sheet-

The balance sheet shows how much a business owns (assets), owes (liabilities) and the amount that is left over for its owners (owner's equity) at a point in time.

Cash flow

Cash flow refers to the total amount of money that is moving in and out of your business.

Chart of accounts

The chart of accounts is a listing of all the accounts used in the general ledger of the business.

Cost of goods sold (COGS)-

The total of all costs associated with producing your products or services.

Credit

An accounting entry that increases a liability or owner's equity account, or decreases an asset or expense account. The term may also be used to refer to an entry on the right side of a T-account.

Debit

An accounting entry that increases an asset or expense account, or decreases a liability or owner's equity account. The term may also be used to refer to an entry on the left side of a T-account.

Depreciation

The measurement of the decline in the worth of an asset.

Common methods of depreciation include: straight line, units of production, sum-of-years-digits and double-declining balance.

Dividends-

Dividends are a payment of profit that a limited company distributes to its shareholders.

It is the money remaining after all business expenses and liabilities, as well as outstanding taxes (including VAT and Corporation Tax) have been paid off.

Generally Accepted Accounting Principles (GAAP):

In the UK, the GAAP is a set of accounting standards published by the UK's Financial Reporting Council (FRC) for reporting financial information.

General ledger

A record of all the accounts that a business uses.

The accounts are classified into three categories: assets, liabilities and equity accounts.

Profit & loss (P&L)

The P&L is a financial statement that shows how much money your business has made or lost.

Liabilities

Debts and obligations of a company.

There are two main types of liabilities: current liabilities and non-current liabilities. Current liabilities (otherwise known as short-term liabilities) are due within a year, while non-current liabilities are due after a year.

Equity

Equity can have several meanings in accounting.

Firstly, it refers to the net amount of finances an owner has invested in the company.It can also refer to the residual value of assets less liabilities, as represented by the accounting equation ‘Equity = Assets - Liabilities'.

Expenses

Costs incurred by a company for revenue generation.

A few common types of expenses a business may incur are:

• Fixed expenses: The total amount of the expense doesn't change over the short-term, despite changes in sales volume or other business activities. Examples include lease and rent payments.
• Variable expenses: As its name suggests, the total amount of the expense varies in proportion to changes in sales, production or other business activities. Examples include salaries, utility expenses or costs of raw materials.
• Operating expenses: Expenses incurred for activities that aren't directly related to the production of goods or services. Examples include administrative expenses, or legal and financial fees.

Net income

Otherwise known as net profit, net income refers to a business' financial position when the total revenue is more than the total expenses.

Present value (PV)

Present value is a calculation that measures the current value of a sum or stream of money to be received in the future, through adjusting for inflation and interest.

Return of investment (ROI)

A metric of profitability used to measure the gain or loss that an investment generates, relative to the sum of money invested.

Revenue

The amount of money a company receives from selling its goods or providing its services.

It refers to the amount earned before expenses are deducted.

Trial balance

A trial balance is a report that lists the balances of all general ledger accounts of a business at a specific point in time.

An expense should be recorded in the same period that the related revenue is earned.

For small business owners and contractors who have just started out, staying on top of your business finances and documents can be daunting.

Here's where our article comes in, so you can quickly get a grip on the basics.

**1. Furlough scheme extended to September 2021

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The government has committed to continue paying 80% of employees' wages when they are unable to work, with employers not having to make any contributions until July 2021.

**2. Support for the self-employed extended to September 2021

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As part of the covid support package from the government, the the Chancellor confirmed that he will extend the self employed income support scheme with those submitting a self assessment tax return before midnight 2nd March being eligible.

**3. Universal Credit uplift to stay for 6 months

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The £20 weekly uplift in Universal Credit has been extended for a further 6 months, with Working Tax Credit claimants being eligible for a £500 one-off payment.

For self-employed persons or employers, it can be challenging trying to understand the rules surrounding benefits in kind. These can be complicated; some benefits are taxable while others aren't, and it gets tricky figuring out which rules apply to your situation.

To make things a little easier to understand, we've written up a quick guide below. After reading our guide, you'll understand what benefits in kind are, have a clearer idea of which ones are taxable (and which ones aren't), and get an overview of what you need to do when it comes to reporting and paying taxes on benefits in kind.

Do keep in mind that this isn't a definitive guide, as HMRC's decision to impose a tax varies by situation. If you need specific advice, doconsult our specialist accountants at Forma.