If you are the owner of a personal or family company, it is prudent to review your dividend strategy before the 2024/25 tax year comes to an end, as assessing whether paying a dividend before 6 April 2025 would be beneficial.
Sufficient retained profits
The first point to note is that dividends are payable from retained profits and the payment of a dividend can only be entertained where the company has sufficient retained profits from which to pay a dividend. These are post-tax profits on which corporation tax has been paid.
Unused dividend allowances
Where the shareholders have not used their dividend allowances in full for 2024/25, as long as the company has sufficient retained profits, it will generally be worthwhile to pay a dividend to make use of these unused allowances. All individuals are entitled to a dividend allowance regardless of the rate at which they pay tax. For 2024/25, the dividend allowance is set at £500.
Dividends are treated as the top slice of income. No tax is payable where the dividend is sheltered by the allowance, but the allowance does use up part of the tax band in which it falls. In this way, the dividend allowance operates like a zero-rate band rather than a true allowance.
Where a company has more than one shareholder, the dividend strategy will depend on whether the company has an alphabet share structure. This is where each shareholder has their own class of share, for example, A ordinary shares, B ordinary shares, etc. Where this is the case, the dividend payable to each shareholder can be tailored to the level of their available dividend allowance.
In the absence of an alphabet share structure where all shareholders have the same class of share, dividends must be paid in proportion to shareholdings.
Unused personal allowance
While it will generally be preferable to pay a salary equal to the personal allowance before extracting profits as dividends, if the company has shareholders who do not work in the company and who have not used their personal allowance for 2024/25 in full, it can be beneficial to pay them further dividends to mop up their unused personal allowance. There will be no further tax to pay on dividends which are sheltered by the personal allowance.
Unused basic rate band
Suppose profits are needed outside the company and the shareholder has not used up all their basic rate band for 2024/25. In that case, it may be preferable to pay a dividend before 6 April 2025 where it will be taxed at the dividend ordinary rate of 8.75% if the dividend will be taxed at a higher rate (either the dividend upper rate of 33.75% or the additional dividend rate of 39.35%) if the dividend is paid in 2025/26.
Leave the profits in the company
Suppose the dividend allowance and the personal allowance have been used in full and funds are not needed outside of the company. In that case, it may be preferable to leave the profits in the company as paying a dividend before 6 April 2025 will come with an associated tax bill.
You might also like to read: Do you now need to pay tax on your dividend income?
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