With a new dividend tax regime now in place, many limited company owners will be keener than ever to minimise their exposure to the more punitive levels of taxation wherever possible. The timing of dividend declarations is an integral part of this strategy.
Here Duncan Strike from Intouch Accounting answers two of the questions most often asked by our visitors; involving the timing, and tax point of dividend declarations.
1) When I declare dividends, when are they actually taxed? At the date they are declared, or when they are paid?
Neither, is the correct answer! A dividend will be included on your tax return according to the date it was declared as becoming payable, regardless of the date it was actually paid. For example, declaring a dividend on 1st April 2016, payable on 7 April 2016, is included as income in your 2016/17 tax year.
If the amount was paid on 4th April it would be a loan, until 7th April. It would not change the tax year it’s regarded as a dividend. You should keep copies of all dividend vouchers and minutes that support the dividend in order to prove this to HMRC should they ever investigate.
Your accountant should be able to provide you with a template to use, and then send them copies each time for their records. Alternatively, you can download board meeting minutes and a dividend voucher template here.
There are tax planning opportunities here too. If you don’t want to physically pay yourself a dividend at a set point in time, but you have some of your basic rate tax band remaining and the company has sufficient profits, you can declare a dividend immediately payable with the intention of taking cash at a later date. This ensures the dividend falls into a certain tax year and allows you to fully utilise your tax allowances year on year.
Bear in mind that on 6th April 2016 the £5,000 dividend allowance was introduced. This is taxed at zero rate so it is advantageous to take at least £5,000 in the tax year, no matter what tax rate band you fall into. The way subsequent dividends are taxed also changed significantly with fixed dividend tax rates coming into play.
You can find out how much more dividend tax you will pay in 2016/17 compared to the previous year via our tax hike calculator.
2) How often should I pay myself dividends? I’ve been told that monthly payments might look like disguised salary
You can pay yourself dividends as often as you like, although we generally recommend monthly or quarterly.
As long as you have the correct paperwork in place, including both dividend vouchers and minutes, and the company has sufficient profits to cover the distributions then there’s little danger HMRC could successfully argue that the dividends were salary.
We do advise clients to keep dividend and salary payments separate and pay each shareholder separately in the correct proportions, just to provide a clear audit trail.
Having clear and concise records makes life a lot easier during an HMRC review, as not only does it make every item easy to trace but it also provides some degree of reassurance that there’s nothing remiss hidden in the mess!