How to time dividend payments
There are a few considerations you should make when considering the timing of dividend payments, these considerations vary depending on whether you are a basic rate tax payer, a higher rate tax payer or a lumpy earner (sometimes one, sometimes the other). Keep in mind throughout this post that you pay income tax based on when you receive the dividend (using the personal tax year of April through to March) not on when your company earns profits.
Frequency of dividend payments (dispelling a myth)
I have heard it said that HMRC take a dim view of you regularly paying yourself in dividends. They probably do but there is absolutely nothing wrong with it. You can pay yourself a weekly or daily dividend if you want and it is perfectly legal and fine. As long as you follow the guidelines to avoid an illegal dividend (ie profits + voucher + board minutes) there is nothing HMRC can do about it. (Practical considerations mean once a month is probably going to be much more sensible!)
Basic rate tax payers
As we keep saying, basic rate tax payers pay no income tax on dividends. So it really doesn’t matter when they pay themselves from a tax perspective. You should of course still consider when it is best to pay from a cash flow perspective though.
Higher rate tax payers
Higher rate tax payers do have to pay a portion of income tax on dividends received. For dividends received between 6 April and 5 April of a tax year the tax is due on January of the following year (the picture is complicated somewhat by payments on account but that’s another topic).
What this means is that if you want to take out money at the start of the calendar year it might be worth waiting until mid April so you push the tax liability into the next tax year. You then won’t have to pay any income tax on it for another 21 months instead of nine months had you paid it in March.
In some industries business profits are volatile, you might be a higher rate tax payer one year and a basic rate tax payer another year. Let’s say you want to take all profits out of your company and in Year 1 your business earns £50,000 but in year 2 it earns only £20,000. You probably don’t have the crystal ball to know this but let’s assume it nonetheless.
You can time your dividend payments to smooth your earnings so that you effectively earn £35,000 in year 1 and £35,000 in year 2. This is because income tax is incurred when you pay yourself a dividend not when the company earns a profit.
There are two ways you can achieve this:
- Simply declare and pay your dividends so that it works out as £35,000 in tax year 1 and £35,000 in tax year 2.
- If instead you want the cash as soon as possible you can still get it.. Take out the full £50,000 in tax year 1, but only declare a dividend of £35,000. Classify the remaining £15,000 as a shareholder loan. When the next income tax year rolls around declare that final £15,000 as a dividend and wipe out your shareholder loan account in the process. Note you MUST do this within nine months of your companies year end or you may be liable for additional tax.
Move on to part 5 of our Dividend Guide to learn how to avoid paying yourself an illegal dividend.
Caprica Online Accountants – Dividend guide
1. Advantages of paying yourself with dividends
2. Getting the right mix between salary and dividends
3. Understanding the dividend tax credit
4. The best way to time dividend payments
5. Illegal dividends and how to avoid them
6. IR35 and Dividends (for contractors only)
How Caprica Online Accountants can help
At Caprica Online Accountants we advise all our limited company clients on the most tax efficient way to structure their pay as part of our great fixed fee online accounting packages.