Make sure you fully utilise the director / shareholder's lower rate tax band
With the tax year of 5 April 2015 fast approaching, it is important to consider whether sufficient dividends have been declared to fully utilise the director / shareholder’s lower rate tax band of £41,865.
Peter Way – Rider, Tax Manager at Ellis & Co Chartered Accountants and Business Advisers, says:-
“It is important to keep track of the dividends you take out of the business to ensure that you fully utilise the director / shareholder ‘s lower rate tax band. Salary and Dividends can easily accrue and become greater than the lower tax band rate which means you will automatically pay a higher rate of tax. Likewise those Directors / Shareholders who have not perhaps accrued large dividends to date, still have the opportunity to declare further dividends before the 5th April to ensure they make the most of their allowances.”
So how do you know if you have taken too little or too much? Here is an example Ellis & Co has established to help you:
A Director / shareholder’s income will typically be:
Salary (£833 x 12) £ 9,996
Dividends (£28,682 plus tax credit) £31,869
If the shareholder’s income between 6 April 2014 and 5 April 2015 is less than £41,865 then he / she can declare further dividends before 5 April 2015, subject to there being sufficient profits or reserves in the business to do so.
On the other hand:-
If the shareholder’s income between 6 April 2014 and 5 April 2015 is greater than £41,865, then it might be wise to defer the dividend until 6 April 2015 or later. This will delay the payment of any higher rate tax liability for a further 12 months.
Peter continues: “It is important to make the most of this allowance as you cannot carry forward any un utilised lower rate tax band into the next tax year.”
So what else do you need to know about Dividends?......
- A dividend does not have to be physically paid out and can be credited to a Director’s loan account.
- Using dividends rather than a salary also avoids triggering employer’s and employee’s national insurance contributions.
- All dividends must be supported by a Director’s minute or dividend voucher.
- Minutes must be produced even if the company only has one Director
- Your company must not pay out more in dividends than its available profits from current and previous financial years.