Around this time of year some may be thinking of making a final dividend declaration before the end of the tax year.
However getting your timing right on your dividend declaration is very important; being out by just a couple of days could be a very costly mistake to make.
Some seem to make the mistake of thinking that the new tax year starts on 1st April rather than 6th; making a dividend payment on or after 1st April and before 6th April could mean a higher tax bill than anticipated.
Let’s take an example ….
Steve is an IT freelancer operating a limited company. He has a number of clients in the London area. During the tax year 2013 / 2014 he has been paying himself a small salary of £641 a month (£7, 692 for the year) and takes the rest as dividends.
He knows that, as he has no other income, he can pay up to £30,382 net dividends from the company before he will pay more tax and he has been able to declare and pay a dividend of £25,000 on 31st December 2013.
His company is doing well and has enough retained profits to pay another dividend of £15,000 and is debating when would be the best time to declare the dividend.
Options
- Declare and pay the dividend on 31st March 2014 – this would mean total dividends net dividends of £25,000 + 15,000) £40,000 being (£40,000 / 90 * 100) £44,444 gross dividends putting his total income at (£44,444 + 7,692) £52,136 for the tax year 2013 / 2014.
At this level of income he would pay an additional £2,405 of income tax on his income
Maths – Earning of £52,136 less personal allowance of £9,440 = £42,696 of which the first £32,010 is taxed at 20% = £10,686 at 22.5% tax on dividends at higher rate = £2,405 in additional tax
- Declare and Pay the dividend on 30 April 2014 which pushes it into the tax year 2014 / 2015. Any additional tax liability would be calculated at the end of that tax year once Steve’s total income was established.
- Declare a dividend of £5,000 on 31 March 2013 and leave any further dividend until after 6 April 2014.
This approach would mean that Steve’s total income for 2013 / 2014 remains below the level at which he would start to pay higher rate tax. He can then see how the business performs in 2014 / 2015 and decide on his dividend strategy for that as the time comes.
Advice
If you are in a similar position to Steve or need advice on declaring and paying dividends then contact your accountant who should be able to help you. They may expect an up to date set of accounts so that the company’s financial position can be assessed to ensure that it is a position to make a dividend declaration.
