Should I maximise my dividends in 2015/16 or delay until 2016/17?

As we are approaching 5 April 2016, it is important to ask yourself 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 2015/16 tax year.

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, up until 5 April 2016, this dividend would incur no further liability to tax for that person, but would leave the dividend available in the director’s loan account, to be taken out at a later date whenever required, with no tax implications.

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 a tax charge of 25% of the net dividend (or 30.56% if at the additional rate tax level), unless of course the dividends were needed to cover drawings from the business.

However, with effect from 6 April 2016, all dividends in excess of the £5,000 dividend allowance, will be subject to a tax charge of 7.5% of dividends within the basic rate band, 32.5% at the higher rate, and 38.1% at the additional rate.  This equates to an additional rate of 7.5% at each level. 

Therefore, there might be a case of voting additional dividends in this current year (subject to reserves) to “save” 7.5% tax compared to taking them in 2016/17.  The most obvious downside to this is that the tax will be payable a year earlier than if the dividend is delayed, but some might feel that this is a small price to pay to save themselves some tax.

It certainly won’t suit everybody, especially in view of the cash flow effects, but if you feel that this might apply to you then please get in touch with your usual contact at OBC so that we can look at the position for you. 

Alison Headey - (If you have any questions, contact me ah@obcaccountants.com or call me on 01323-720555)

 

 

 

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