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OCL Accountancy: always consider maximising your dividends

The coronavirus has caused problems for some companies where the owner managers use ‘dividends’ as a method to extract profits – and may do so for some time to come. How might a similar situation be avoided in future and what benefits are there to taking dividends early?

The general tax advice to director shareholders on maximising tax and NI efficiency is to take a small salary (usually around the NI secondary threshold of £8,840 per year) and top it up with dividends.

However, dividends can only be paid from profits (current year or retained) and if your company is making losses, has no reserves, and you rely on income from it, you’ll either have to take more salary (costly & inefficient in tax and NI) or borrow from your company, which can also be tax inefficient depending on how you repay the debt The coronavirus has resulted in many companies seeing losses and needing to adopt salaries as the method of taking an income from their company.

In uncertain times like these it can be good advice to take as much by way of dividend as profits allow, even if you have no immediate need for the cash. What you don’t draw is simply credited to your director’s loan account and is available to be drawn when you need it. There will be no tax payable at that time, because the dividends will be recorded and tax paid for the current tax year (i.e. when they are recorded).

Even thought this means that you are paying tax in an earlier year than would otherwise be necessary, it will almost certainly give you an overall lower tax liability than if you had to take additional salary in the problem years.

But this advice doesn’t only apply to companies facing future losses and issues. As we are all aware, the country is facing a large debt that will need to be paid over time; we all await the Chancellor’s announcements in the future and can anticipate tax rates rising.

It therefore follows that taking dividends now will almost certainly mean that you will pay tax at a lower rate than in future years; there can be a significant benefit to front ending your drawings even if it does result in tax being paid.

For tax saving tips contact us – call Marie Sheldrake, Tom Hulett or Mike Wilcox on 01225 445507; oclaccountancy.com