The end of the tax year has particular implications for the company director client and the payment of dividends, but this year the dividend allowance falls from 6 April. From £5,000, it goes to £2,000. So, in the last couple of days left to plan for 2017/18, what are the dangers to be avoided – and what opportunities may there still be for clients to take advantage of?
Last Minute Planning Point
The impact of the reduced allowance will depend on which tax band the first £5,000 of dividends sits within; but potentially the impact is considerable. If the £5,000 falls into the basic rate tax band, the additional tax payable is £225 – 7.5% basic rate tax on dividend of £3,000; in the higher rate band, the extra tax is £975 (32.5% x £3,000); and in the additional rate band, the extra tax is £1,143 (38.1% x £3,000).
Whilst the fall in corporation tax rates (19% from April 2017, and to 17% from April 2020) provides some compensation, where a company has sufficient profits for the year, plan to accelerate dividend payments before 6 April to take a last bite at the £5,000 allowance where this allowance has not already been used. Potentially you may have two bites, in a company with spouse/civil partner director shareholders. Even at this stage, you can determine whether your client is able to do this to minimise the effect of the fall in the dividend allowance.
Paying Dividends: The Basics
Dividend payment is a potential minefield, and practitioners need to ensure that clients are following correct procedure in order to avoid an unwelcome challenge from HMRC. A dividend can only be paid if the company has sufficient retained (post-corporation tax) profits from which to pay it; and it must be properly declared. Further, dividends can only be paid in accordance with shareholdings.
To pay an interim dividend, the procedure is as follows:
- Establish that there are profits available for distribution;
- Calculate the total dividend payment available;
- Calculate the dividend payable per share (note complications with dividend waiver);
- Hold a board meeting approving the payment;
- Pay shareholders and issue dividend vouchers.