dividend allowance 2020/21

How Can a Self Employed Personnel Benefit From £2,000 Dividend Allowance 2020/2021

01/02/2021Limited Company , Tax Issues , Tax Saving Tips

All taxpayers can claim their tax-free dividend allowance. Dividend Allowance 2020/21  is set at £2,000. This is a golden opportunity for all the self-employed personnel to registered for self-employed. If you’re thinking of making the switch, you need to do it right now.   Let’s Discuss the Nature of Allowance If you own a limited company, and you’ve registered it as a self-employed. The good news is that you can take out some money as dividend allowance 2020/21. You can even take out these dividends if you’ve got some shares in the company. The ‘dividend allowance’ is at zero rate band. You don’t have to pay taxes on these dividends, but these count towards band earnings. If you’ve not utilized any personal allowance, you can also avail dividends under the personal allowance. These will be counted as free of tax.   What Dividends are Not Covered by the Allowance If your dividends are not shrouded under dividend allowance or personal allowance, count them as taxable. These dividends will be taxed under regular tax rates. Dividends are considered as the prime source of income if the taxpayer has other sources of income too. The dividend is taxed at 7.5% such that it falls under the basic rate band. At 32.5% to the extent that it falls within the higher rate band and at 38.1% to the extent that it falls within the additional rate band. All these tax rates are applicable in 2020/2021.   How to Use the Dividend Allowance 2020/2021? If you’re not using the dividend allowance in 2020/2021, you might end up losing it. The tax year comes to an end in 5th April 2021, so it’s a good option to review what dividends you’ve taken up, and what dividends do you wish to take up in the future? The COVID-19 may have an impact on your shared income. And this changes things overall for you. Whether you’re a self-employed individual or taking up dividends from a family investment, you might want to take up more of these dividends to make sure that you’re utilizing your allowance. Remember that dividends can be only paid from retained earnings.   Can you Pay Dividends if your Business is Facing any Losses? Paying Dividends from your company’s income is not affected by losses. If your business faced loss in 2020/2021, and there are any chances of profit that can compensate for the losses as well as for the dividends then go forward and avail them. It’s important to go by the company law requirements and pay your dividend allowance 2020/21 using the alphabetic share structure if you own family business. Like one shareholder has A-class share, another shareholder has B class share. This is helpful in using all your family member’s dividends.

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Tax Saving on Dividends

Timing dividends right could help save tax

12/08/2019Personal Tax , Tax Issues , Tax Saving Tips

Timing the date of a dividend payment from a company can determine both the amount and the due date of the tax payable. This may be a particularly useful strategy in a close- or family-owned company. The dividend allowance, which was originally introduced from 6 April 2016, was cut from £5,000 a year to £2,000 from 6 April 2018. Fortunately, the tax rates on dividend income, above the allowance, remain at 7.5% for basic rate taxpayers, 32.5% for higher rate taxpayers, and 38.1% for additional rate taxpayers. The amount of tax on dividends income is determined by the amount of overall income an individual receives during a tax year. This includes earnings, savings, dividends, and non-dividend income. The amount of tax on dividends paid depends primarily on which tax band the first £2,000 falls in.   Accelerating payment The timing of the dividend payment may have a marked impact on the directors’ and shareholders’ personal tax situation. A dividend is not paid until the shareholder receives the funds directly or the dividend amount is put unreservedly at his or her disposal, for example by a credit to a loan account on which the shareholder has the power to draw. If the personal tax allowance and basic rate band for a tax year have not been fully utilized towards the end of the tax year, payment of a dividend may mean that the unused portion can be mopped up.   Example Graham is the sole director and shareholder of a limited company. He is considering whether to pay a dividend before the end of the 2019/20 tax year. In that tax year, he has other income of £25,000. He has retained profits in the company of £100,000. For 2019/20 the personal tax allowance is £12,500 and the basic rate tax band is £37,500. The dividend allowance is £2,000. If Graham pays a dividend of £27,000 before the end of the 2019/20 tax year, he will fully utilize his basic rate band and will be liable to tax at 7.5% on the £25,000 of the dividend income (the first £2,000 of the dividend being covered by the dividend allowance).   Delaying payment Where the shareholder already has income exceeding the basic rate band in one tax year, delaying the dividend until the start of the next tax year could save tax.   Example Following on from the above example, say Graham has already paid himself a salary of £50,000 in the 2019/20 tax year, thus fully using up his basic rate band. If he pays the £27,000 dividend before the end of the tax year, he will pay tax on it of £8,125 (£27,000 – £2,000 allowance x 32.5%). This tax will be due for payment on 31 January 2021. If he waits until the start of the next tax year (2020/21) to pay the dividend, and also receives a salary of £25,000 during that year, the tax due on the dividend will be £1,875 (£25,000 x 7.5%) – a potential saving of £6,250. Graham will also benefit from a delay in the due date for payment of the tax until 31 January 2022.   Fluctuating income Dividend payments can often be timed to smooth a director/shareholder’s earnings year-on-year. Broadly, where profits fluctuate, a company could consider declaring and paying dividends equally each year, or by declaring a smaller dividend in the first year (when profits are higher) and treating the remainder of the payment as a shareholder loan. At the start of the next tax year, a further (smaller) dividend can be declared, which will repay the loan. Care must be taken with this type of arrangement, not least because the loan must be repaid within nine months of the company’s year-end to avoid a tax charge arising on the company. The family business potentially offers considerable scope for structuring tax-efficient payments to family members using a mixture of both salary and dividends. A pre-dividend review may be particularly beneficial towards the end of the company’s year-end. Additional Note: ITA 2017, s 8 and s 13A; F(No 2)A 2017, s 8;  CTA 2010, s 455

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