As we have known for some time, dividend tax rates are increasing on 6 April 2016. Many companies will be considering whether to declare dividends before then so that shareholders can pay tax at the current rates.
Whether it is advantageous for you to receive income in 2015/16 that would normally be received in 2016/17 will depend on your personal circumstances. It might not be sensible to pay more tax this year if:
- the dividends will be less than £5,000 and hence be included in your 2016/17 nil-rate dividend allowance;
- the extra income would be taxed at 25 per cent in 2015/16, but would only be taxed at 7.5 per cent in 2016/17; or
- the additional dividend would take your income above £100,000 and the extra tax payable by virtue of the loss of your personal allowance would far outweigh next year’s tax rise.
So how much dividend should you be paying?
On the assumption that it would indeed be advantageous to pay an additional dividend before 6 April 2016, the question is how much?
You might be looking at the company’s cash balance to decide what you can afford to pay out to avoid the hike in tax rates. Remember, however, that it is entirely feasible to declare a dividend of any amount (not exceeding the company’s distributable reserves) and simply credit the amount to a loan account in the company’s books. No cash need leave the company’s bank account at this stage.
The government is aware that people will be looking to take additional income before 6 April 2016; however it seems relaxed because, whilst the tax might be paid at a lower rate, it will be paid earlier than otherwise would be the case.
That said, you need to recognise that dividends are only treated as paid, and hence become taxable, on the date they become due and payable.
A final dividend that has been properly declared, which does not specify a date for payment, creates an immediately enforceable debt – so if you want a final dividend to be taxable in 2015/16, either stipulate that it is payable before 6 April 2016 or don’t specify a date for payment (but please don’t declare a dividend now and state that it is payable after 5 April 2016).
An interim dividend, on the other hand, can be varied or rescinded at any time before payment and is therefore regarded as due and payable when it is actually paid.
Payment is not made until the right to draw on the dividend exists. It follows that, if you plan to declare a large interim dividend and credit it to the shareholder’s loan account with the company, you should ensure that the books and records are also written up before 6 April 2016. HMRC might well ask for proof.
If it makes sense, by all means consider advancing the payment of dividends, but remember to get the documentation right.
If you would like to discuss any of the details in this article, please contact Stuart Robb.