Maximise Tax Efficiency: Key Tips for Small Company Directors and Shareholders
As the tax year-end approaches, it’s the perfect time for small company directors and shareholders to take charge of their finances and reduce tax liabilities on dividend payments. With a few strategic moves, you can ensure your dividend income is managed in the most tax-efficient way possible.
Shrinking Tax-Free Dividend Allowance: Act Now
Starting April 2024, the tax-free dividend allowance will drop from £1,000 (2023/24) to just £500. This means only your first £500 of dividend income will escape taxation. Any amount above this will be taxed at standard rates:
– 8.75% for basic rate taxpayers
– 33.75% for higher rate taxpayers
– 39.35% for additional rate taxpayers
With this reduced allowance, it’s more important than ever to explore alternative tax-efficient strategies to safeguard your income. Learn more about dividend taxation on HMRC’s website https://www.gov.uk/tax-on-dividends
Stay Within the Right Tax Bands
One major tax-saving strategy is ensuring your total income stays within the most favourable tax bands. For example:
– Basic Rate Band: Income up to £50,270 is taxed at the lower 8.75% dividend rate.
– Exceeding this pushes you into the higher rate band, where dividend tax jumps to 33.75%.
– If your income exceeds £100,000, the personal allowance (£12,570) is gradually reduced, creating an effective marginal tax rate of 60% between £100,000 and £125,140.
Strategic dividend planning can help you avoid these higher-taxed income brackets. Check your income tax rates and bands https://www.gov.uk/income-tax-rates
Timing is Everything
When it comes to dividend payments, timing can significantly impact your tax bill. Dividends are taxed in the year they’re paid, giving directors flexibility:
– If you expect higher income next year, consider declaring dividends before 5 April 2025 to take advantage of current rates.
– Alternatively, if a lower-income year is on the horizon, deferring dividends may help reduce your overall tax liability.
Dividends vs Salary: Find the Perfect Balance
Balancing dividends and salary is a smart way to optimise tax efficiency:
– A low salary up to the National Insurance threshold (£12,570 for 2024/25) helps you use your personal allowance while minimising National Insurance.
– Supplement this with dividends to reduce your overall tax burden.
For directors needing to withdraw additional funds, employer pension contributions can be a game-changer. These contributions are corporation tax deductible and not subject to income tax or National Insurance, making them a highly tax-efficient alternative. Explore pension contributions and tax relief https://www.gov.uk/tax-on-your-private-pension
Avoid the Directors’ Loan Tax Trap
If you’ve borrowed money from your company, ensure it’s repaid within nine months of your company’s year-end. Otherwise, you risk a hefty 32.5% Section 455 tax charge. Conversely, if the company owes you money, consider repaying loans instead of taking dividends for a tax-free way to extract funds. Understand more about directors’ loans https://www.gov.uk/directors-loans
Make the Most of Your Spouse’s Tax Allowance
Another way to save on tax is by utilising a spouse’s unused allowances. If your spouse is in a lower tax bracket, dividends paid through separate shareholdings (e.g. alphabet shares) could reduce the family’s overall tax burden by shifting income to a lower-taxed individual. Learn about transferring assets to reduce tax https://www.gov.uk/income-tax/income-tax-and-dividends
Let’s Plan Your Strategy Together
Every business has unique circumstances, and there’s no one-size-fits-all solution. With the tax year-end fast approaching, now is the time to act. Book an initial planning session with us to review your dividends vs salary options and ensure your finances are in top shape for 2024/25. Don’t leave it to chance, call us today!
Please see another An Accounting Gem blog: https://www.aag-accountants.co.uk/understanding-the-new-tax-changes-for-pick-up-trucks-effective-april-2025/
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