How often should I take dividends? When are dividends taxed?
Since the 2016 dividend tax increase, many limited company owners have been interested in keeping their tax as low as possible. The timing of the dividend declaration is a very important part of this strategy. Watch our video to learn more.
When I declare dividends, are they taxed at the date they are declared or when they are actually paid?
They actually are not taxed at either point! A dividend will be included on your tax return according to the date that it was declared and become payable, regardless of the date that it was actually paid.
For example, if you declared a dividend on 1st April 2018, payable on the 7th April 2018, this will be included as income in your 2018/19 tax year because the 7 April is in that year. If for any reason the dividend was paid on the 4th April, then it would be regarded as a loan until the 7th April. It wouldn’t change the tax year of the dividend.
You should keep all the copies of the dividend vouchers and minutes that support the dividend just in case HMRC investigate – you’ll have something for proof. Your accountant may be able to provide you with a template to use, or complete them for you.
For tax planning opportunities, you can declare a dividend immediately payable with the intention of taking the cash at a later date. You can do this if you don’t want to pay yourself a dividend at a set point in time, but you have some of your basic rate tax band remaining and the company has sufficient profits. This will ensure that the dividend falls into an earlier tax year and then will allow you to fully utilise your tax allowances.
Currently, you can receive £2,000 of dividends tax free each year and, therefore, it is advantageous to take at least £2,000 in the tax year, no matter what tax rate band you fall into.
How often should I pay myself dividends?
We recommend paying yourself dividend monthly or quarterly, although you can actually pay yourself whenever you like.
Having all the correct paper work, including the dividend vouchers and the minutes, and proof that the company has the sufficient profits to cover the distributions means you are safe from HMRC arguing that the dividends are a salary. You don’t want HMRC to think that your dividends are a salary as this won’t be tax efficient to you.
Overall, there are great advantages to paying yourself dividends such as them being tax free up to £2,000. As long as your business has the available profits to issue the dividends, you can pay yourself dividends whenever you want.
If you would like any more information, please feel free to get in touch.