The Budget is just days away with changes to the tax rules and rates on the cards. As a company owner manager who takes income mainly as dividends, how can you control when they are taxed to maximise tax efficiency?
Dividend timing
As a company you’re probably aware that dividends are usually the most tax-efficient way for company owner managers to extract profit from their businesses. Less well known is exactly how the timing of dividends affects when and even how much tax is payable.
For example, the tax for a dividend paid soon after the start of the tax year is not payable for almost 21 months. Taking advantage of this is not as simple as it might be as HMRC’s rules can trigger the tax charge earlier than you think.
Dividend types
There are two types of dividend, interim and final. There are different rules for when tax on each is payable. While both types count as taxable income on the date on which they are “paid”, tax rules define “paid” in a special way.
Interim dividends
An interim dividend can be paid for tax purposes when the shareholder is entitled to draw the money. That can be earlier than when the company actually pays the shareholder by bank transfer etc. The dividend becomes taxable income as soon as the shareholder has the right to draw on the dividend, e.g. when the dividend is credited to the director’s loan account (DLA).
Power Tip. If you want to control the date when an interim dividend is “paid”, your company should not record it in its accounting records, e.g. as a credit to your DLA, until the date you want it to become taxable.
Final dividend
The “paid” date for a final dividend is usually the date it’s approved by the shareholders at a general shareholders’ meeting.
Example. Your company’s financial year ends on 31 December. On 3 March 2025 the shareholders approve the final dividend proposed by the directors for the year ended 31 December 2024 but no date of payment is specified. For tax purposes, the dividend counts as paid on the date it was approved, 3 March 2025, even if it isn’t available for the shareholder to draw for weeks or months. This falls in the tax year 2024/25 and, under self-assessment, any tax on the dividend is payable on 31 January 2026. However, the tax bill can easily be deferred by a year.
Power Tip. When approving a final dividend specify when it is actually going to be paid. Make sure the payment date is recorded in the company’s minutes. In our example, if the minutes of the general meeting had stated that the dividend was to be paid on 6 April 2025, i.e. in the following tax year, the shareholders would not have to pay the tax on it until 31 January 2027. This could even save you tax if your financial circumstances will change, e.g. your income is reducing because you’re retiring in the next year.
Power Tip. If you need the cash ahead of the planned “paid” date of a dividend, you can draw it through your DLA. This doesn’t change the date that the dividend is taxable. When the dividend is paid it will be used to clear the DLA debt created when you drew the cash.
The timing of tax on dividends depends on when they are treated as “paid” for tax purposes. This can be earlier than when the money is transferred to your bank account. However, by using your director’s loan account it’s possible to access cash ahead of the dividend “paid” date while delaying when the dividend tax is payable.
This article has been reproduced by kind permission of Indicator – FL Memo Ltd. For details of their tax-saving products please visit www.indicator-flm.co.uk or call 01233 653500.