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 — the amount you can receive tax-free — has been reduced to £500 for the 2024/25 tax year. Above this, dividends are taxed at the following rates:
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8.75% for basic rate taxpayers
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33.75% for higher-rate taxpayers
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39.35% for additional rate taxpayers
Your tax band is determined by your total income, including salary, savings, and dividends.
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 his limited company. In the 2024/25 tax year, he earns a salary of £25,000. He’s considering whether to pay a dividend before 5 April 2025.
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Personal allowance: £12,570
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Basic rate band: Up to £50,270
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Remaining allowance in basic band: £25,270
If Graham pays a £25,770 dividend:
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£500 is tax-free (dividend allowance)
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£25,270 is taxed at 8.75% = £2,166.13
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Remaining £500 is taxed at 33.75% = £168.75
Total dividend tax: £2,334.88
This timing allows Graham to take advantage of the lower 8.75% rate before crossing into the higher band.
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
If Graham already earned £50,000 in the 2024/25 tax year, his basic rate band is nearly used up.
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If he pays a £27,000 dividend before 5 April 2025:
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First £500 tax-free
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Remaining £26,500 taxed at 33.75% = £8,943.75
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But if he delays the dividend to 2025/26, and earns only £25,000 in that year:
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All £27,000 dividend income remains within the basic rate band
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£500 is tax-free
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Remaining £26,500 taxed at 8.75% = £2,318.75
Tax saved by delaying: £6,625
Additionally, the tax is due one year later — giving a useful cash flow advantage.
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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
