Allocating and Paying Dividends procedure

1

What I am going to do after the 1st April - i.e on the 30th April 2020 is I will be paying the following every month.

Salary, petrol, Heating/Lighting and Dividends

Because I have found it very difficult to keep track of what I am being paid Dividends wise because of the DLA account, I will be instead be paying myself a Dividend every month not drawing on the DLA anymore. The plan is to stop using the DLA entirely.

The way it will work is to use an example of £100 a month.

£60 a month would be salary - this I would draw every month
£20 a month would be heating and lighting - this I would draw every month
£10 a month approx would be petrol. This I would draw every month, but the amount will differ slightly every month based on my mileage.
So in this particular month, I would pay myself £10 this month. Next month it might be £9.70 or £10.20 depending on how much I spend on Petrol (as this is the only factor that changes).

Ultimately I will always transfer £100 every month to my personal account.

I pay the Salary, Petrol and Heating and Lighting using payslips so this creates an entry in employee clearing account in the BS and in Salary, Business Mileage and Use of Home profit & loss accounts.

This has three advantages.

  1. I can see how much the company allocates every year to these expenses using the Profit and Loss.

  2. I can see how much I owe to myself the employee (if anything) by looking at the employee clearing account in BS. This should be zero if I am fully paid up.

  3. I am keeping all transactions in the respective expense accounts in P&L and in employee clearing account. There is nothing cluttering up Journal Entries. This makes it very easy to review this expenditure annually using P&L as well as to view expenditure over the years using employee clearing account.

My question is:

Should I be allocating my dividends into employee clearing account on BS and Dividends on P&L so that I can achieve the same three advantages above. It would make sense in a way to include dividends in the employee clearing account as I am paying salary, petrol and Home Use in that account so having all the “employee expenses” together is intuitive and logical.

After talking to my accountant, I was going to create Journal entries and allocate to Dividends Payable on the BS and Dividends on the P&L, however upon reflection, I realise that this is not satisfactory as it will create a lot of entries in Journal Entries (as I will be paying the Dividends monthly now). The Journal Entries should be used sparingly for cases such as accruals etc, not for regular activity every month in my opinion. Journal Entries will have dissimilar accounts and entries added there over time, so I don’t really want loads of Dividend Payments appearing in there making it harder to go through the Journal Entries.

However, I do lose the advantage of seeing all my dividends paid over the years in the Dividends Payable BS account as it will be in the employee clearing account. Granted I could just type Dividends to filter it.

Secondly, I am not sure whether my approach meets accounting standards as Dividends are not really something that is supposed to go onto employee payslips?

I could actually go with the approach of creating one Dividend Allocation on the 31st April for the entire year using Journal Entries and pay out 1/12 every month against the Dividends Payable Account. However this approach creates a much bigger Dividend Expense in the P&L account at the beginning of the financial year distorting the first month’s profits of the Business. I am also keen to completely remove Dividend transactions from Journal Entries.

Is the payslip route the best route in my user case scenario.

1 Like
2

I am going to get my accountant to rethink this. I don’t think I should be paying dividends monthly as HMRC can claim it’s salary. Secondly putting Dividends on the payslip will most like send a red flag as it’s not recommended accounting procedure.

I might have to go back to using the DLA but with the difference that I have Dividends in the P&L as well as liabilities so as to make it easier to keep track of my annual dividends. Also it will keep the monthly payments out of the Journal entries.

I will close this question. Thank you. Guess I will have to leave it open. Can’t work out how to close it!

3

You should not use payroll to record dividends paid. Dividend advance payments should be allocated to your shareholder loan account and when the company declares the dividend the following journal entry can be made:

image
image782×589 12 KB

4

Yes. I have come to that conclusion myself. It would be a breach of accounting rules. I have decided that I will simply go back to using the DLA as the accounts used would be DLA and Bank and then just do one journal entry each year for Dividends.

What you have shown is how I was planning to do it, but I would have called the accounts Dividends Payable. However, I wanted to do it on a monthly basis which would mean 12 entries in Journal Entries each year, which means dozens of dividend entries in the journals cluttering up that tab. I prefer to use that tab just for accruals and year end accounting.

Thank you.

5

I don’t think you should worry about this. While Manager minimizes the need for journal entries, that was a design decision that avoids the need for figuring out which accounts to debit and credit for many common situations. There is nothing inherently undesirable about journal entries; indeed many accounting systems accomplish everything through journal entries, and Manager’s other tabs are really journal entries in disguise.

6

@Tut I am not worried about it in the sense that you are correct. You can use Journal entries for anything and in theory it makes no difference if you have ten or 1000 entries in there.

However I feel that to optimise the design of accounting that the Journal entries should be used only for end of year accounting like accruals, corporation tax, dividend allocation (for the year) etc. So for me that tab is my end of year accounting transactions tab, not to be used for monthly transactions in general.

My solution of using the DLA and Bank for monthly means that I keep loads of transactions out of Journal Entries which I don’t think should be there.

I think that Lubos would probably agree with me as I believe his aim is to ultimately remove journal entries completely once functionality to do reverse accruals etc has been implemented.

7

No you wont lose the advantage as you will see the dividends paid over the years in the P&L Dividend account instead. If you do a P&L report comparing 3 years you will see the dividends paid for each year. The BS Dividends Payable BS Account will only show the balance still owing at the end of each year, not the total dividend paid for that year.

Secondly, I wouldn’t be using the DLA account at all for Dividends.

8

@Brucanna Good point about the Dividends Payable. Yes I only see what is still owing, not what has actually been paid. Correct.

However, I am surprised that you recommend paying the Dividends on employee payslip. I would have thought that this violated a number of accounting principles because Dividends are only payable to shareholders, not employees and secondly HMRC could say it’s basically salary! According to a couple of Google Searches, more than one accountant said that paying Dividends on an employee payslip is a big no no and essentially sends a red flag to the taxman!

I agree it would be cleaner and easier but I am not sure that accounting rules allow it? I;d be happy to use it as it would solve a lot of my problems, but I don’t know if HMRC would like that approach?

1 Like
9

That’s a question for your local accountant, @dalacor. Sometimes, what works for financial accounting raises questions for the tax authority, as you suggest.

1 Like
10

I don’t see the issue. The payslip is being recorded as an open and transparent transaction. The person could also be a Director and receive Director Fees, should this also be excluded from the payslip.

None that I can think of. If you were trying to disguise the salary payments as dividends due to favourable tax conditions, then perhaps, but in your case you are just simplifying the disclosed payments.

I think the HMRC would be more focused on non-disclosure rather than full disclosure transactions.

However, if you are uncomfortable with this and now being “fully compliant” with importing bank statements you could set up a Direct Debit for the monthly dividend and the bank rules will make it all seeemmmleeesss.

1 Like
11

I will talk to my accountant about this and see what he thinks. HMRC can be very funny about certain things and even I am dubious as to whether this would be classed as disguising salary payments as dividends due to favourable tax conditions.

There are two links that are relevant to this query.

The gov.uk website is the HMRC (taxman’s) official requirements which have to be met by law.

I am not meaning to be nitpicky. I want to ensure that I don’t end up having a legal battle with HMRC in ten years time over the issue. It will be a battle I won’t win.

My understanding is that a payslip is pertinent to employees. Dividends only go to shareholders, not employees. Which is why using payslips doesn’t sound right as the transaction has nothing to do with employees.

Secondly, I would be required by law to create 12 Dividend Vouchers (one a month), instead of one annually. Not a big deal, but I would be required to do that.

Well technically I am bumping up my salary in the form of dividends as it is more tax efficient. Having said that in the past I just did this through DLA and I can’t really see the difference between dumping it into DLA or putting it on the payslip. The end result is still the same - I am bumping up my salary with dividends to make best use of tax rates.

I will ask my guy what he thinks.

12

Okay it appears that the UK has a quirk in that it has a separate tax regime for Dividends and Salaries. Whereas in the jurisdictions I function the dividends and salaries fall within the one regime - same tax rates regardless.

Therefore it would be prudent to document separately. I am guessing that the Dividend take was being “rorted”, hence the reduction from 5,000 to 2,000 per year tax free.

13

Essentially yes. That’s why I am reluctant to get caught up in a battle with HMRC over the issue! I will put it in DLA as borrowings and do one dividend at the end of the year. Far safer as far as the taxman is concerned.

14

@dalacor, I’m possibly reading too much into what you say here, but also be wary of building up a DLA overdraft each year and paying it off with one dividend payment. Look up “director’s loan bed and breakfasting” for more detail - and again speak to your accountant. You’re right that dividends each month don’t look great, but dividends every 4 or 6 months are fine… (as long as the profit is available to cover the dividend payment).

1 Like