Pre 5 April Dividend Planning – Green Accountancy

There can be significant advantages to tax planning surrounding the timing of extracting dividends prior to 5 April each year.

The first £1,000 of dividends for the tax year 2023-24 is tax free.

Dividends above this allowance and within basic rate band are taxed at 8.75% and dividends at higher rate are taxed at 33.75% (2023-24).

To optimise your dividend position it is usually beneficial to at least use your basic rate band for 2023-24 where company reserves permit. For example, you do not want to have £30,000 total income in 2023-24 (leaving £20,270 basic rate band unused) and £60,000 in 2024-25 (paying higher rate tax). There will be much less tax in total if the income can be similar in both years, perhaps by voting additional dividends on or before 5 April 2024.

Similarly, if you have exceeded your basic rate band during the current year and know your income may be less in 2024-25, you may want to hold off on voting further dividends until after 5 April 2024 so that you are not paying unnecessary higher rate tax now that you may not have to pay next year.

Of course dividends can only be taken if the company has sufficient post tax reserves to do so. If there is not enough post tax reserves in the company to pay the dividend voted then it will not be valid.

To calculate the optimum dividend to use your basic rate band to be taken now (assuming the company has sufficient reserves):

– Start with personal allowance (£12,570 for 2023-24) add Basic rate band (£37,700 for 2023-24) = £50,270

– Add any personal pension contributions made in year (gross amount = net paid x 100/80) (ignore company or employer contributions). These must be made under a basic rate tax relief at source arrangement, do not include in the calculation if this is a net pay arrangement or salary sacrifice.

– Deduct gross salary and any other income that will be recorded on your 2024 tax return (including any letting income, self-employment, other jobs etc.)

– Deduct dividends taken so far

This will leave the basic rate band remaining.

As long as the company has enough reserves, it doesn’t matter if there is not sufficient cash in the company to pay the dividends you have voted. In this case, dividends can still be voted now and credited to your director’s loan account, increasing the amount the company owes you. The dividend can then be paid to you at a later date when the company has cash to do so.

Pension

You also have a £60,000 pension annual allowance (employee or employer contributions) available and you can check this on HMRC’s website here. We cannot advise on pensions as an investment, you would need to speak to an Independent Financial Advisor (IFA) for this, however company paid pensions can be very advantageous from a tax perspective.

Other considerations

Don’t lose your child benefit (applicable if receiving child benefit and the highest earner exceeds £50,000)

If you or your partner receives child benefit and one of you earns over £50,000 some or all of this may need to be repaid. Once adjusted net earnings exceeds £60,000 all of the child benefit received will be payable.

Pension contributions and Gift Aid donations reduce adjusted net income so if you are considering making these in the future you might wish to make these prior to 5 April to bring you below this threshold.

Don’t lose your personal allowance (applicable if income exceeds £100,000)

For every £2 that your adjusted net income exceeds £100,000 the £12,570 personal allowance is reduced by £1. This restriction results in you effectively being taxed at 60% on income between £100,000 and £125,140.