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Dividend tax: pay dividends early if you can

The highly unpopular dividend tax will arrive in April 2016, meaning that the majority of business owners will pay more tax. Doug Perry, chartered accountant at Clayton & Brewill, suggests paying dividends early where possible.

When the Chancellor announced the new dividend tax, we ran some immediate calculations to compare the tax implications for directors’ remuneration. Would a pay package weighted towards dividends still be the most tax-efficient? Or should directors move to a more salary-based remuneration strategy?

Our Dividends vs Salary blog showed that a low dividends / high salary option remains the most attractive. But there’s going to be a very real impact on directors’ take home pay.

The dividend tax will be introduced on 6 April 2016, affecting dividend payments made within the 2016/2017 tax year.

The first £5,000 of dividends will be tax free. Once this threshold is reached, dividends will be taxed at an additional 7.5% for all tax payers.

Basic rate payers will be taxed on their dividends for the first time, whilst higher and additional rate taxpayers will see their tax bills rise.

For example:

£50,000 annual dividend – will be taxed at an additional £2,527

£100,000 annual dividend – will be taxed at an additional £5,267

£200,000 annual dividend – will be taxed at an additional £13,417

So what can you do? The answer in the long-term is, unfortunately, not a lot. If you are approaching retirement – and can afford a smaller take-home amount – then it makes sense, from a tax perspective, to divert some of the planned dividend income towards your company pension.

A short-term way of offsetting the effect is to bring forward dividend payments into the current financial year and pay them on or before 5 April.

Before paying a dividend early, there are a number of things you need to consider:

Is there enough cash in the company?

Are there sufficient distributable reserves?

Will paying dividends early affect any other aspects, such as inheritance tax planning?

How will your credit rating be affected if you clear out your balance sheet to make an early payment?

Make sure your bookkeeping and accounts are up to date so that you can make a sensible decision. Talk to your accountants well before the end of the tax year so you have a clear picture of your company’s financial position and assess whether or not it is possible to bring forward some of next year’s dividend payments into the current financial year.

Clayton & Brewill can help you to understand and assess your individual position and explain any changes that you need to make.

For a confidential and friendly conversation please contact us on 015 950 3044 or send us an email.

Clayton & Brewill is a chartered accountancy firm and provides audit, tax and advisory services to individuals, owner managed businesses and SMEs across the Midlands, from its network of offices across the region in Nottingham, Long Eaton and Melton Mowbray.