As the end of the tax year approaches, director-shareholders have a valuable opportunity to make tax-efficient decisions regarding their income. One of the key ways to do this is through dividends, which often provide a more efficient way to extract profits compared to a traditional salary. With upcoming changes to the dividends tax landscape, it’s essential to act before 5th April 2025 to maximise tax savings and keep more of your hard-earned money.
Why dividends are a tax-efficient choice
Dividends are a popular method of taking income from a company, as they are taxed at lower rates compared to salary payments. Unlike salaries, dividends are not subject to National Insurance contributions, making them a tax-efficient choice for director-shareholders. However, with annual dividend tax allowances set to change, planning ahead is crucial to ensure you take full advantage of the current thresholds before the new tax year begins. Staying informed about dividends tax and how it impacts your overall earnings can make a significant difference in your financial strategy.
Understanding the dividends tax rates
For the 2024/25 tax year, the dividend allowance stands at £500, meaning that the first £500 of dividends are tax-free. Beyond this, basic-rate taxpayers pay 8.75% in dividends tax, higher-rate taxpayers pay 33.75%, and additional-rate taxpayers pay 39.35%. These rates mean that extracting profits via dividends is still a tax-efficient option, but with the dividend allowance having been reduced in recent years, director-shareholders must plan carefully. By reviewing your dividend strategy before 5th April 2025, you can ensure you are making the most of the current tax environment.
Timing your dividends before the tax year ends
Timing is everything when it comes to dividends tax planning. If you have not yet utilised your dividend allowance for the current tax year, now is the time to do so. Declaring and paying dividends before the tax year-end allows you to take advantage of the remaining allowance and potentially reduce your overall tax liability. Additionally, if your company has retained profits available, you may wish to consider issuing further dividends while the rates remain unchanged. Effective planning now can prevent higher tax burdens in the next financial year.
Ensuring compliance with HMRC rules
It’s important to ensure that any dividends paid are properly documented and meet HMRC’s requirements. Dividends must be issued from company profits after corporation tax has been deducted, and the correct paperwork, including dividend vouchers and board meeting minutes, must be in place. Failing to document dividends correctly can result in HMRC challenging the payments, potentially leading to unexpected tax liabilities. This is where professional guidance from Accounts & Returns can help ensure compliance whilst maximising tax efficiency.
Get expert advice on dividends tax
At Accounts & Returns, we specialise in helping director-shareholders optimise their tax positions and navigate the complexities of dividends tax. With ex-HMRC staff on our team, we offer expert advice to ensure you remain compliant whilst making the most tax-efficient choices for your business.
If you’re looking to review your dividends strategy before 5th April 2025, now is the time to act. Get in touch with our team today to make sure you’re making the most of the available tax-saving opportunities.
