It’s only two years since the government reformed the regulations on company dividend taxation, introducing an annual tax-free dividend allowance of £5k, with dividend income above this amount being taxed at 7.5% for basic rate taxpayers, and 32.5% or 38.1% for those on higher rates.
But things are changing again. From April 2018, the annual tax-free dividend allowance that everyone is entitled to will be slashed from £5k to just £2k.
This is a big change, and it will affect all limited company owners remunerating themselves through dividends. If this includes you, and you’ve not already taken your full £5k allowance in the tax year 2017-18, you need to act now and make sure you take any remaining allowance out of your business before April – or you’ll pay more in tax than you need to.
If for example, you normally take a £4k dividend each year, you might want to consider maximizing your tax efficiency by increasing your dividend to £5k for the current tax year 2017-18, and reducing your 2018-19 dividend to £3k. This way, you’ll extract the same dividend over two years, but you’ll only have to pay tax on £1k rather than on £3k in the next tax year!
Is it Time to Restructure Your Company?
Assuming you’ve not done so already, the reduction in the dividend allowance is also a good reason to look again at the way your limited company is structured.
The tax-free dividend allowance is available to everyone, regardless of whether they pay basic rate, higher rate or even no tax at all, and for this reason, it could be worth reviewing the shareholding structure of your business, and considering making your spouse, civil partner or another close family member a shareholder. By diverting some dividend income, you’ll maximise the tax efficiency of your business for future years.
Declaring Dividends: 4 Things You Need to Know
While we’re on the subject of dividends, this seems like a good opportunity to recap some of the key things you need to know about them:
- In order to be able to declare a dividend, your accounts must show your company to be profitable on a cumulative basis. This means that if the company has made any historical losses, these must have been cleared by generating subsequent profits – or there must still be sufficient profit remaining in the business to cover the dividend you are planning to take.
- A dividend can only be paid after you have allowed for Corporation Tax. You may have heard that dividends are not subject to Corporation tax – this is a common myth, but a complete fallacy.
- Any dividends you take out of your company must be properly documented. You can do this yourself by using a dividend template pack – or by employing a professional accountant like Inca to take care of all paperwork and ensure you stay fully compliant.
- You don’t have to wait until your accounts have been produced to declare a dividend. As long as you follow the above rules, and can show that you have sufficient profit in your business after tax, you can take a dividend any time you want to.
With the rules on the way dividends are taxed changing imminently, it’s crucial you act quickly. At Inca, we can advise you on the most tax-efficient dividend strategy, help you to make use of your full allowance before the Chancellor closes the door, and take care of all paperwork and compliance. We can also review the way your limited company is set up, and advise if restructuring the way that shares are held could save you tax in the future.
Call us now on 0123 586 8888 for an initial chat and to arrange a meeting!