If you’re the owner of a personal or family company, now is the time to review your dividend strategy before the 2024/25 tax year comes to a close. With the tax year ending on 5 April 2025, assessing whether to pay a dividend before then could make a real difference to your tax position.
So, what should you consider before making your decision? Let’s break it down.
Does Your Company Have Enough Retained Profits?
First things first—your company can only pay dividends from retained profits. These are the post-tax profits left in the company after Corporation Tax has been accounted for. If your company doesn’t have sufficient retained profits, paying a dividend isn’t an option.
Have You Used Your Dividend Allowance?
Each individual shareholder is entitled to a £500 dividend allowance for the 2024/25 tax year. If this hasn’t been used yet, it could be worth declaring a dividend before 6 April 2025—provided the company has the profits to do so.
The dividend allowance works like a tax-free band. Any dividends covered by this allowance won’t be taxed, but they do count towards your overall tax band.
If your company has multiple shareholders, how dividends are distributed depends on your share structure:
- Alphabet Shares: If your company has an alphabet share structure (e.g. A ordinary shares, B ordinary shares, etc.), dividends can be tailored to each shareholder’s circumstances.
- Standard Shares: If all shareholders hold the same type of shares, dividends must be paid proportionally to their shareholdings.
Could You Use Any Unused Personal Allowance?
For many directors, it’s more tax-efficient to take a salary up to the personal allowance before paying dividends. However, if you have shareholders who don’t work in the business and haven’t fully used their £12,570 personal allowance, a dividend before 6 April 2025 could be a great way to make the most of this tax-free threshold.
Should You Take Advantage of the Lower Basic Rate?
If you need to withdraw funds from the company, it may be worth considering your tax bands before taking a dividend.
- If you have remaining space in your basic rate band (£12,571 – £50,270), dividends will be taxed at just 8.75%.
- If you delay and take those dividends in 2025/26, you could end up paying higher rates of tax (33.75% or 39.35%), depending on your income.
So, if you expect your income to be higher next year, bringing forward your dividend payment before 6 April 2025 could save you a significant tax bill.
Should You Leave Profits in the Company?
If you’ve already used your dividend allowance and personal allowance—and you don’t need the money personally—it might be best to leave the profits in the company. Paying a dividend now would create an immediate tax liability, whereas keeping the funds in the business allows for more flexibility in the future.
Need Help Deciding?
Dividend planning can have a big impact on your overall tax position, so it’s important to get it right. If you’d like personalised advice on the best strategy for your business, get in touch with Jon and the team today. We’ll help you make the right choice for your finances before the tax year ends!
Call us or email us to discuss your options.
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