From 6 April 2018, the dividend allowance was reduced from £5,000 to £2,000. To find out how you can time your dividends to pay as minimum tax as possible please to read below.

How does it affect me?

If you receive dividend income above the allowance of £2,000 then you will pay the following tax:

  • 7.5% if you are a basic rate taxpayer
  • 32.5% for higher rate taxpayers
  • 38.1% for additional rate taxpayers

The amount of tax that you will have to pay on your dividend income will be determined by the income you receive during the tax year. The income includes any savings, earnings, dividend and non-dividend income.

The amount of dividend tax you will pay will be based upon the tax band the first £2,000 falls in.

What do I need to know?

The timing of dividends is important as they determine the amount of tax the individual will pay and the date the tax must be paid.

If you have not used all of your personal tax allowance and basic rate band for a tax year, you can time your dividend so that the unused amount can be used for the dividend.

If a shareholder has an income exceeding the basic rate band, then it is worth delaying the dividend to the start of the next tax year, so that you can save on tax.

Example:

Gemma is a sole director and shareholder of a limited company.

She has income of £25,000 and has profits in the company of £100,000. She is considering paying a dividend before the end of the 2019/20 tax year.

The personal tax allowance for 2019/20 is £12,500 and the basic rate tax band is £37,500.  The dividend allowance is £2,000.

Gemma can pay herself a dividend of £27,000 before the end of the 2019/20 tax year to utilise her basic rate band and will only have to pay tax at 7.5% on the £25,000 of the dividend income (the first £2,000 is covered by the dividend allowance).

If Gemma has already paid herself a salary of £50,000 in 2019/20 tax year, then if she decides to pay herself the dividend before the end of the tax year, she will pay tax at 32.5%.

So, it would be beneficial for Gemma to delay the dividend to the start of the 2020/21 tax year and pay herself a salary of £25,000 so that the tax due on the dividend will be at 7.5%. This will save her a total of £6,250.

She will also benefit as the date of the tax payment will be delayed until 21 January 2022.

Fluctuating Income

If your business income fluctuates, then it may be worth paying dividends equally each year.

You can also declare a smaller dividend and take the rest as a shareholder loan. This will mean that you can repay the loan with another dividend at the start of the next tax year.

If you do decide to treat the dividend as a shareholder loan, then you must repay the loan within 9 months of the company’s year end so that the company avoids a tax charge.

Further Actions

You should make sure that you consider the timing of your dividends as there are massive tax savings to be made.

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