Maximising Your Dividend Allowance Before the End of the 2023/24 Tax Year

As we approach the close of the 2023/24 tax year, it’s a crucial time to consider if you’ve fully utilised your dividend allowance. If you haven’t, it might be a smart move to extract additional profits as dividends before the year ends. Remember, once you’ve taken a salary up to the personal allowance (£12,570), drawing further profits as dividends is a tax-efficient strategy.

Understanding the Dividend Allowance

The dividend allowance is a boon for taxpayers at all income levels. For the 2023/24 tax year, it’s set at £1,000 but will decrease to £500 in 2024/25. Dividends within this allowance are tax-free, though they still occupy a portion of your tax band. Think of it more as a zero-rate band rather than a pure allowance.

Dividend Tax Rates Explained

Dividends, taxed as the top slice of your income, generally face lower tax rates than regular income. Within the basic rate band, dividends are taxed at 8.75%; in the higher rate band, it’s 33.75%; and for the additional rate band, the rate is 39.35%. These rates are notably lower than the corresponding income tax rates of 20%, 40%, and 45%.

Paying Dividends: Key Considerations

Remember, dividends are paid from post-tax profits that have already incurred corporation tax. A company must have sufficient retained profits to pay dividends. Also, dividends must correspond to shareholdings. However, with an alphabet share structure, where each shareholder has a different class of shares (like A, B, etc.), dividends can be more flexibly managed to suit each shareholder’s situation.

Utilise the Allowance Efficiently

If you haven’t declared any dividends in 2023/24 and have the profits, it’s advisable to use your allowance. With the allowance decreasing next year, dividends exempt from tax this year might not be so next year. In family company setups, ensure all shareholders have used their dividend allowance to avoid wasting it. Tax-free profit extraction options are limited, so it’s wise to make the most of them. When calculating your unused dividend allowance, don’t forget to include dividends from investments.

Further Dividend Considerations

 

If you need additional funds and have already used up your dividend and personal allowance, think about the tax rate on further dividends. If you haven’t fully used your basic rate band, extracting dividends before 6 April 2024 could be beneficial, especially if you anticipate moving into a higher or additional tax bracket in 2024/25.

 
 
 
 
 
 
 
 
 
 
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