Tax accountants play a vital role in helping individuals and businesses maximize tax savings. This is particularly beneficial for closely held or family-owned companies. As of April 2024, the tax-free dividend allowance has been reduced to £1,000 per year, down from £2,000. The tax rates on dividend income remain at 8.75% for basic rate taxpayers, 33.75% for higher rate taxpayers, and 39.35% for additional rate taxpayers. The amount of tax payable on dividend income is calculated based on an individual’s total income during a tax year, which includes earnings, savings, dividends, and non-dividend income.
Accelerating Payment: Timing Matters
The timing of dividend payments significantly affects the tax liabilities of directors and shareholders. A dividend is not considered paid until the shareholder actually receives the funds. Tax accountants often advise on how to optimize this timing. For instance, a dividend could be credited to a loan account from which the shareholder can draw.
Example:
Graham is the sole director and shareholder of a limited company. He is contemplating whether to pay a dividend before the end of the 2023/24 tax year. In that tax year, he has additional income of £30,000 and retained profits in the company of £100,000. For the 2023/24 tax year, the personal tax allowance is £12,570 and the basic rate tax band is £37,700. If Graham pays a dividend of £27,000 before the tax year ends, he will utilize his basic rate band and incur a tax liability of 8.75% on the amount exceeding the £1,000 dividend allowance.
Delaying Payment: A Tax-Saving Strategy
If a shareholder’s income exceeds the basic rate band in one tax year, delaying the dividend payment until the next tax year can lead to significant tax savings.
Example:
If Graham has already paid himself a salary of £50,000 in the 2023/24 tax year, which fully utilizes his basic rate band, paying the £27,000 dividend before the year-end would incur a tax liability of £8,625 (£27,000 – £1,000 allowance x 33.75%). However, if he waits until the next tax year (2024/25) to pay the dividend, he would be able to take advantage of the lower tax rates, saving potentially £6,500 and delaying the tax due until 31 January 2026.
Fluctuating Income and Tax Efficiency
Timing dividend payments can help smooth a director or shareholder’s earnings year-on-year. When profits fluctuate, a company might consider declaring and paying dividends each year. By declaring a smaller dividend in a year of high profits and treating the rest as a shareholder loan, the company can manage tax liabilities more effectively. A further dividend can then be declared in the next tax year to repay the loan.
Family businesses offer considerable scope for structuring tax-efficient payments to family members, and a pre-dividend review may be especially beneficial toward the end of the company’s fiscal year.
Conclusion
Understanding how to manage dividend payments is crucial for minimising tax liabilities. Engaging tax accountants for guidance can help ensure that directors and shareholders maximize their tax efficiency while remaining compliant with current regulations.
Disclaimer: All the information provided in this article on tax saving on dividends, including all the texts and graphics, is general in nature. It does not intend to disregard any of the professional advice.