Dividends: planning issues

By Tolley
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The following Owner-Managed Businesses guidance note by Tolley provides comprehensive and up to date tax information covering:

  • Dividends: planning issues
  • Tax liabilities for dividends
  • Timing of dividends
  • 'Leapfrogging'
  • Alphabet shares
  • Post Acquisition Benefits from Securities

Tax liabilities for dividends

There is generally a tax advantage to extracting profits by way of dividends, often once a salary had been taken to utilise the personal allowance, ensure entitlement to certain state benefits and in certain cases to ensure payment of at least the National Minimum Wage. This is true even following the changes to the taxation of dividends post April 2016, although from that date the tax advantage gap between salary and dividends has narrowed; see the Salary v dividend guidance note.

However, dividend planning is still important to taxpayers and is not as straightforward as it appears on the surface. Dividend planning strategies include consideration of cashflow issues, administrative ease as well as tax savings. Clients whose businesses were previously run in unincorporated forms often find it difficult to adhere to remuneration strategies and need to exercise particular care in this area.

A newly incorporated business needs to be aware of the legal requirements for paying dividends, as set out in the Dividends: payment procedures and practical issues guidance note. Furthermore, it is important to ensure that shareholders are aware of any personal tax liabilities relating to dividends.

Higher and additional rate on dividend payments

One aspect of dividend planning that is commonly overlooked is the effect of dividends being forced up into the higher tax rates. This is one of the reasons why dividend planning should be undertaken only with reliable estimates of other incomes. It is also a reason why dividend planning is sometimes best left until towards the end of the tax year.

The differential between the basic rate and higher rate of income tax on dividends is greater than that for earned income and savings. As the top-slice of income, it is also the income that breaches the higher tax rate and additional rate band.

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