Partner Article

The art of successful dividend planning

Simon Hayden, Partner at Perrys Chartered Accountants, discusses the importance of dividend planning and how successful planning will benefit your business

For many business owners, the dividends that they take out each year from their company will be based purely on a combination of the profits/cash available in the business and what is needed to maintain their current standard of living.

However, for those that are in the fortunate position that their profits/cash exceeds what they need to draw it presents an opportunity for some dividend planning in order to minimise their personal tax liabilities.

The rate of tax that you pay on dividends depends on which tax band the dividends fall into. From 6th April 2016, for basic rate tax payers, dividends over £5,000 will be taxed at 7.5%, for higher rate tax payers the rate is 32.5% and for those paying tax at the additional rate, the rate of tax is 38.1%.

These different tax rates present certain planning opportunities. For example, as the first £5,000 of dividends are tax free, wherever possible, it makes sense to pay dividends of at least this amount. Likewise, if profits enable you to declare dividends up to the limit of your basic rate entitlement, then at a tax rate of 7.5% you may wish to consider doing so, even if not all of this income is needed.

Conversely, if some of your dividends are simply going to be transferred to a personal savings account, but you have had to pay higher rate tax on these dividends, would you be better off leaving this cash in the company and avoiding this tax charge?

Two further planning points arise where your income exceeds either £50,000 or £100,000. At £50,000 you will start to lose any child benefit you receive and at £100,000 you will start to lose your personal allowance.

In addition to adjusting the level of dividends which you draw from the business you might also want to consider making additional pension contributions or transferring shares in your company to your spouse.

Given that there are planning opportunities as well as potential pitfalls, I would encourage the regular review of dividend levels with a professional.

This was posted in Bdaily's Members' News section by Georgina Garman .