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Dividend scenario 3

Purchase of an asset

This is a very common reason for the Maximum Dividend amount not matching your bank balance. If you have any assets this can cause a dramatic difference between the dividend amount available and your bank balance.

Dividends are based on your company’s profits after tax. Expenses will reduce your profit and in turn reduce the Maximum Dividend Amount available. However, assets are not treated in the same way as an ordinary expense.

The Purchase of an asset does not affect your profit immediately – instead it is offset against your profit over the course of a number of years.

For example, if you buy a Computer at a cost of £1000 and declare this as an asset, this purchase will reduce your bank balance by £1000 but your profit will initially remain unaffected. The purchase of the asset will also have an immediate effect on the amount of Corporation Tax you owe, reducing it by an amount that is 20% of the value of the asset. This is standard Accounting practice.

In essence, the purchase of an asset will reduce your bank balance but will actually increase the dividend amount available!

Because the effect of Assets on the Maximum Dividend amount is quite complex, here is an example:

Scenario without Asset

   

Bank Balance

Sales

10000

10000

Minus Expenses

2000

8000

Gives Net Profit

8000

 

Minus Corporation Tax

1600

6400

Gives Maximum Dividend Available

6400

 

Scenario with Asset

   

Bank Balance

Sales

10000

10000

Minus Expenses

2000

8000

Asset Purchased for £1000

   

Gives Net Profit

8000

7000

Minus Corporation Tax

1400

5600

Gives Maximum Dividend Available

6600

 

As can be seen in the Example with the purchase of an Asset your Bank Balance is reduced by £1000 (which is the price of the asset) but the available dividend amount is actually higher by £200 (because your Corporation Tax bill has been reduced by £200, which is 20% of the value of the asset).

This is part of a troubleshooting series on 'Why does the maximum dividend available not match my bank balance?'

Last Updated: 14 Sep 2015 11:15AM BST

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