Dividends used to be a tax-efficient way for company owners to extract profits from their business but recent changes have seen the tax advantages reduce significantly.
The latest blow to owner-directors will take effect from 6 April 2018 when the tax-free allowance on dividends falls from £5,000 to £2,000.
With a month until the new allowance takes effect, now is the perfect time to review your dividend strategy and put plans in place for the next tax year.
Tax on dividends 2018/19
At the moment the first £5,000 of dividends are tax-free. Dividends above this are taxed at different rates according to your income tax band.
You may pay tax on dividends at more than one rate as your income tax band takes into account other income as well as dividends.
This only change for 2018/19 is the reduction of the tax-free allowance.
The table illustrates the impact of the reduction on someone who only has dividend income.
| Annual slice of income | Tax rate | |
| 2018/19 | 2017/18 | |
| Up to £11,850 | Up to £11,500 | nil |
| £11,851 – £13,850 | £11,501 – £16,500 | 0% |
| £13,851 – £46,350 | £16,501 – £45,000 | 7.5% |
| £46,351 – £150,000 | £45,001 – £150,000 | 32.5% |
| More than £150,000 | More than £150,000 | 38.1% |
What are your options?
Although dividends are not as attractive as they once were, they can still play an important role in tax planning. Here are some things to consider:
Use your 2017/18 allowance
Make full use of the £5,000 band before 6 April 2018 if you haven’t done so already. You can’t backdate a dividend so you need to get planning now.
Combine with a salary
Drawing a salary of just over £8,000 will build your entitlement to the state pension and keep your access to certain state benefits through your national insurance contributions (NICs).
Corporation tax
Corporation tax is due on profits before dividends are paid. Remember to take this into consideration when planning your remuneration mix.
Pensions
Dividends can’t be used for making personal pension contributions. Instead, the company could pay into your pension scheme as an employer.
This is usually a more tax-efficient approach as the company’s contribution is tax deductible and there are no employer class 1 NICs due.
Do you need the money?
The final thing to remember is you don’t have to take money out your company if you don’t want to.
Almost every way of extracting profits will create some sort of tax charge so if you don’t need the cash, it may be sensible to leave it where it is.
Talk to us
Tax planning can be tricky when your personal and business finances are closely linked. Get in touch to discuss your dividend strategy.