Is it worth taking dividends any longer in 2018..19 or should we stick with remuneration from now on?

We are regularly asked whether it would be beneficial to increase the dividends being paid out to the shareholders of your owner-managed businesses before the end of the 2018/19 tax year, or should shareholder directors take remuneration instead.

Under normal circumstances, we would always recommend to vote sufficient dividends to bring a person’s  income up to the level at which higher rate tax would be payable, assuming the reserves are available in the company.  This is because this dividend would only incur a 7.5% additional liability to tax for that person, as long as they are taxed at lower rate, with currently the first £2000 of dividend being free of tax.

Every situation is different, but unless the money is needed for a specific purpose, we would not usually recommend taking further dividends to go into the higher rate band, as they will then be subject to an additional tax charge of 32.5% on the dividend (or 38.1% if at the additional rate tax level), unless of course the dividends were needed to cover drawings from the business, in which case a decision will need to be made as to whether to vote remuneration instead.

The whole situation regarding overdrawn directors loan accounts has become much less flexible,  and we will do another blog about that shortly.

The advantage of a dividend is that it does not reduce declared profits, but you have to have sufficient profits in reserve to cover any dividends voted.

The advantage of remuneration is that the business gets tax relief on the money paid out; however a big disadvantage is that remuneration attracts significant additional "on-costs" like Employers NIC and Auto enrolment pension costs as well as having to deduct Employee NIC and PAYE at the time of payment.

With the cash flow advantages offered by dividends , it is still considered that Dividends offer a small advantage over remuneration, if you are having to make a choice. 

It certainly won’t suit everybody, and every business has different circumstances, but if you feel that these questions are relevant to you, then please get in touch with your usual contact at OBC so that we can look at the position for you. 

Ryan Smith - (If you have any questions, contact me or call me on 01323-720555)


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