Director-Shareholders: How To Time Your Dividends To Pay Less Tax

A dividend is money paid by a company to its shareholders from its profits.

If you’re the owner of a limited company, you’re usually both a director and a shareholder, which means that you can pay yourself both through:

• salary, and:
• dividends

Unlike a salary, however, dividends can only be paid if the company has made enough profit after Corporation Tax, so it’s not always guaranteed that you’ll be able to pay yourself this way.

It’s a common misconception that dividends are tax-free. They’re not.

Generally, everyone gets an annual dividend allowance, which allows you to take a certain amount in dividends without needing to pay tax. (In the current tax year, that amount is £500.) But once you’ve used up this allowance, any additional dividends you receive will be taxed.

The amount of tax you pay depends on your Income Tax band. The more taxable income you have, the higher the rate of Dividend Tax you’ll usually pay.

As you know, the UK tax system works in tax years, which run from 6 April to 5 April the following year.

Your dividend allowance and your Income Tax bands reset at the start of every new tax year.That means the date you receive a dividend can affect how much tax you pay.

Sometimes, simply waiting a few weeks until the new tax year
begins could reduce your tax bill.

Imagine it’s the end of March and you’ve planned to pay yourself a £20,000 dividend.

However, you’ve already used up your dividend allowance for the current tax year.

If you pay the dividend before 5 April, all £20,000 falls into this tax year.

But what if you don’t actually need the money immediately?
Instead, you wait until 6 April, when the new tax year begins.

Your dividend allowance resets, and your Income Tax bands start again for the new tax year.

Depending on your overall income (see below), this could mean you pay less Dividend Tax than if you’d taken the money just a few days earlier.

No – and this is a really important point. Delaying a dividend doesn’t automatically reduce your tax bill.

It depends on your overall income across both tax years.

For example, if you expect to earn much more next tax year, delaying your dividend could actually mean paying more tax.
That’s why timing works best when it’s considered as part of a wider, long-term tax planning strategy.

Often, yes.

Instead of paying one large dividend before the end of the tax year, some director-shareholders choose to spread payments across two tax years.

Imagine you plan to take £40,000.
Rather than taking the whole amount in March, you might:

• Take £20,000 before 5 April.
• Take £20,000 after 6 April.

This may allow you to make use of your dividend allowance in both tax years and reduce the amount taxed at higher rates.
Exactly how much you save will depend on your other income, though.

Tax should never be the only reason for paying yourself.

Your company must have enough profits available to pay a dividend. If it doesn’t, paying one could create tax and legal problems.

You also need to think about your company’s cash flow.

Taking too much money out of the business could leave it short of cash for wages, suppliers or future investment.

Sometimes the tax saving simply isn’t worth waiting for.

If you need the money to pay personal bills, buy a home or cover other expenses, it may make sense to take the dividend when you need it.

There’s no point saving a small amount of tax if it creates financial pressure elsewhere.

Although timing your payment can help reduce your tax bill, there isn’t a single ‘best’ date.

Instead, you need to ask yourself three questions:

• Has my company made enough profit to pay a dividend?
• Do I actually need the money right now?
• Would waiting until the next tax year reduce my Dividend Tax? (If the full amount you intend to pay yourself within the same tax year falls below your annual dividend allowance, then there won’t necessarily be any benefits to waiting or splitting the payment.)

Answering those questions can help you decide whether paying a dividend now, or waiting a little longer, is likely to be more tax-efficient.

Not necessarily.

Many director-shareholders choose a combination of salary and dividends because it can be more tax-efficient than taking everything as salary.

However, the best balance depends on your circumstances, including:

• Your total income
• Your company’s profits
• Whether you pay higher-rate or additional-rate tax
• Whether you’re making pension contributions

If you’re unsure or your situation is complex, it’s worth speaking to an accountant or tax adviser.

Director: A person legally responsible for running a company and making decisions on its behalf.

Shareholder: Someone who owns shares in a company. If you own your own limited company, you’re usually both a director and a shareholder.

Dividend: Money paid by a company to its shareholders from its profits.
Dividend Allowance: The amount of dividend income you can receive each tax year before Dividend Tax may apply.

Dividend Tax: The tax you may have to pay on dividend income once you’ve used your dividend allowance.

Income Tax Band: The range your taxable income falls into, which determines how much tax you pay. Higher earners usually pay higher rates of Dividend Tax.

Limited Company: A business that is legally separate from its owners. Many small business owners operate through a limited company.

Profit: The money a company has left after paying its expenses. Dividends can only usually be paid if the company has enough profits available.

Salary: Regular pay received as an employee or company director. Unlike dividends, salaries are treated as employment income for tax purposes.

Tax Year: The period HMRC uses for tax purposes, running from 6 April to 5 April the following year.