It is common practice that directors take a small salary and supplement their earnings with dividends, in order to keep the take-home pay as much as possible while adhering to HMRC (all dividends you draw will be taxed as personal income).
Above the tax-free limit of £2,000, the following tax thresholds apply:
- Basic rate – taxed at 7.5% up to £50,000
- Higher rate – taxed at 32.5% from £50,001 to £150,000
- Additional rate – taxed at 38.1% for £150,001 plus
During the Covid pandemic, the government offered a 2.5% loan repayment loan (“BBL loan repayment”). But be careful, these types of deductions are not income and therefore are not taxed when received by the company. Only if BBL funds are drawn as a dividend, then you would pay income tax based on the above rates.
If the company makes a profit after tax in the financial year or accumulates profit during previous years, then you can draw dividends on accumulated profit or reserves. In case the company does not have enough profit or reserves to pay dividends, then it is an illegal dividend. It should be noted that all dividends that are made, drawn when there is no profit, are classified as “illegal dividends”.
Bounce Back Loan loans is not for personal purposes, which could potentially include director’s loans!