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For companies:
Dividend paid (It is not an expense)_____________Add back into net profit
Dividend received (It is not taxable income)__________Deduct from net profit
Is that right?I understand a company cannot withdraw money for its own use, but the question will always mention a director. In a one-man band company, the director withdraws £5000 from the company bank account. If the £5000 is a bonus, when I calculate adjusted profit from net profit, I ignore it. However, the £5000 will be taxed as part of his employment income. If the £5000 is a dividend, when I calculate adjusted profit, I have to add it back to net profit and it will be taxed for corporation tax. In addition, the director also needs to pay income tax on the dividend of £5000. It seemed silly to pay the £5000 as a dividend (kind of taxed twice). The only way I can figure out why it is good to give the £5000 as a dividend is that the company and the director don’t need to pay NIC on it. Is that right? Many thanks.
For adjusted profit we start with profit before tax so dividends paid have not been accounted for so nothing to do with the calculation. Dividends received are exempt so deduct. For bonus v dividend we make no adjustment for the dividend paid and deduct the bonus . Yes the issue is employers and employee NIC of which there is none on dividends
Hope this helpsJust want to make sure I understand you.
Say, A Ltd’s profit before tax is £100,000, the expenses that have been deducted in the calculating this figure include the following:Depreciation:£10,000
Director’s bonus: £10,000
Entertaining customers: £10,000Profit before tax______________100000
Depreciation________________10,000
Director’s bonus________________-
Entertaining customers_________10,000
Adjusted profit________________120,000
Is that right?Many thanks
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