If you are a limited company owner, your dividend timing can be a very important thing to consider. Incorrect dividend timing can cost you money. Well thought out dividend timing will save you money.
Key basic points on dividends
There are a few basic points on dividends that are worth briefly revisiting:
- You need paperwork in place to formally ‘declare’ the dividend. This usually includes up-to-date accounts proving you have profit ‘reserves’ to declare the dividend. Meeting minutes covering your decision to declare it are also important. Dividends us to have a tax credit on them so a ‘tax voucher’ always prepared. This is still best practice now despite the loss of the tax credit. Regardless of the size of your company, it is still required to create this paperwork. If you’re not sure about it, talk to us.
- You will normally declare these as ‘interim’ dividends. Generally ‘final’ dividends need to be declared by ‘resolution’ at your company AGM (Annual General Meeting). For small companies, a formal AGM is unlikely so interim dividends are usually the preference.
- The Companies Act 2006 states that directors are obliged to record details of their decisions made and retain them for 10 years.
- The date at which the dividend is declared and entered into your accounts (usually to your ‘Director’s Loan Account’) is the date at which you are personally taxed on having received that money.
Advanced, regular planning can save you tax when using dividends.
For example, at the time of writing, you have a dividend allowance of £2,000 that means your first dividends up to £2,000 are personal tax-free. Ensuring a dividend is declared before 6th April (presuming you haven’t had any already this tax year) will ensure you do not miss out on relief.
If your spouse or partner is a shareholder, this allowance should also be reviewed against their available allowances. It may be beneficial to declare some dividend to them. You should track your current year income from all sources carefully.
Dividends over your allowance
Dividends over this £2,000 and in excess of your ‘Personal Allowance’ (currently around £12k depending on tax year) are taxable at 7.5%. When you reach the higher rate threshold (~£46k in 18/19), the dividend tax jumps to 32.5%. You should, therefore, be looking to see how close you are to this threshold, and make sure if you do not need to declare further dividends you wait until the 6th April.
If you are below this threshold but the company has sufficient reserves to declare a dividend, it is often best practice to use as much of this ‘basic rate band’ (between 0-£46k in 18/19) as possible.
Even if you do not pay yourself the dividend (because you do not have the cash currently or just prefer not to physically extract it), providing the right paperwork is in place you will credit it to your Director’s Loan Account so you can draw on it when you do need it. This is great if you expect higher cash needs next year.
This year you only have taxable salary and dividends of £40,000 in the 18/19 tax year. There is an additional c. £6,000 left of the basic rate tax band, where dividends can be paid at 7.5%, so make sure you are making use of the full amount.
If the next year you then took £56,000 as you had more need for the cash, £6,000 of this would now be in the higher rate tax band. The basic rate band in 19/20 goes up to £50,000, so you would pay £1,950 tax (32.5%) on this amount.
Where timing matters
If you had declared the dividend (and put all the relevant paperwork in place) in 18/19 and credited it to your Directors Loan Account, you would have paid just £450. This is because you will be taxed in 18/19 on it (at 7.5%), not when you had drawn the money.
Sometimes there can be other reasons that make being in the higher rate threshold favoured. E.g. If you have a need for high earnings to get a particular mortgage, you may want to be taxed on more income in a tax year.
Another opportunity could be to have your spouse own a shareholding, but that’s for another blog post. Additional funds can be extracted as a dividend using the dividend tax-free allowance. You can use some of their basic rate band if you are near the higher rate threshold. This requires some planning as there are a few company law and tax traps here. Make sure you speak to a professional before doing this.
For the vast majority of our clients, we review their accounts at least quarterly. This allows us to plan for the most tax effective way to ‘extract’ money from the company. If you don’t have this service with your accountant, it is worth the investment to do so.
Especially when you approach the tax year end, review your total income against the above to see where you can save tax. Speak to your accountant about this. If you don’t have one – or have one that isn’t doing this, please call us to speak to the team.