Planning your year-end dividend

Tax efficiency

For most company owner managers the most tax-efficient approach for income they take from their companies is a combination of salary and dividends. The former should be equal to their tax-free allowances and reliefs, and the latter enough so that their total taxable income is as close as it can be to the point at which higher rate tax applies. We therefore often see the suggestion that salary should be equal to the personal allowance (£12,570 for 2023/24), with dividends equal to the basic rate band limit (£37,700), but this is a crude formula. The tax rates and bands are different for Scottish income tax but the principles are the same.

Fine tuning tax efficiency

When determining if you should take more dividends, salary or benefits from your company you need to factor in other income you receive and tax reliefs or deductions you’re entitled to. The most common examples are:

• earnings from other employments or self-employments
• dividends and taxable investment income
• tax relief for losses on a trading business
• pension contributions you personally pay or that are deducted from your net of tax salary
• gift aid payments.

The calculation can be tricky, and because you might not know exactly what your income is until after the tax year has ended some educated guesswork is required.

Income timing

Timing extra salary or benefits from your company is relatively straightforward. When salary is paid or a benefit provided it’s immediately taxable. So, e.g. if you decide to pay yourself an extra £5,000 salary before 2023/24 ends, your company only needs to put it through the payroll on or before 5 April 2024. Getting the timing of a dividend right can be more tricky.

Dividend timing

There are two types of dividend, interim and final. Tax rules determine the year for which each type counts as taxable income. Final dividends. These only count as taxable income when approved by the company’s shareholders at a general meeting or by a written resolution. The approval process for final dividends can therefore take time that you don’t have. Interim dividends. These count as taxable income as soon as the money is “placed at the disposal of the shareholder”, i.e. when the money is actually paid, e.g. by bank transfer, or if earlier when the shareholder has the right to draw on the dividend. For example, if you’re a director, this is when the dividend is credited to your director’s loan account. If you’ve decided on the amount of dividend to maximise income tax efficiency for 2023/24, make sure you allow enough time to take care of the admin before the end of the tax year. An interim dividend is usually the best option.