Paying Dividend Taxes

As of this financial year, the dividend tax rate has changed. This affects company directors, individual investors, and small business owners, including contractor limited companies. For any shareholder who is also a decision maker, the question has to be: Should our dividend strategy change? As always with these blogs, we would recommend consulting directly with an accountant as specific situations do vary.

What is the Basic Rate for Dividend Taxes?

Beginning this past April 6^th, the Basic Rate has risen from 8.75% to 10.75% and the higher rate from 33.75% to 35.75%. The Additional rate remains fixed at 39.75%, and the dividend allowance remains at £500. The tax on dividends remains lower than the equivalent tax on salary, but this cost has changed; the most tax efficient way to receive your payment will have changed in addition. Obviously the best course of action will vary wildly between any two contractors or businesses depending upon your requirements. Other factors work taking into consideration include:

The ISA Allowance

Dividends received on investments held in an ISA are tax free; the maximum amount you can invest in ISAs each tax year is currently set to £20,000, and this allowance cannot be carried forward to future tax years. Investments held inside an ISA are also exempt from income tax and capital gains tax. This is very tax efficient, but of course does require you to be able to set that money aside – so how far you can pursue this will vary not just according to your business results but also your own personal needs.

Pension Contributions

As with the ISA, paying dividends into a pension fund allows you to save for the longer term provided that you still leave yourself enough liquidity to handle the year’s expenses – and you should include some allowance for safety when you do! Pension contributions qualify for tax relief at the marginal rate, which can significantly increase the savings made on any proportion of your income you’re willing to set aside for the long-term future.

Taxation Evolves

The best strategy for tax efficiencies will always shift slightly from year to year, and sometimes the ramifications of a change will not be immediately obvious. To make sure you maximise your available opportunities while still remaining fully compliant, we recommend regular discussions with your accountant. Contact us today to find out how we can help.