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  • Writer's pictureBrian Pusser

Tax Efficient Ways To Use Dividends

Updated: 5 days ago


Tax efficient ways

The next dividend from your company isn’t due to be paid for another few months. However, arranging for it to be paid earlier, or taking an extra dividend, can provide an opportunity to save some tax on your company benefits. What’s involved?


How much tax?

The taxable amount depends on two factors: the cost of providing the asset and any additional expenses, e.g. for maintenance of the asset.

Example. Carol is an owner manager of Acom Ltd. She wants to spend less time commuting and so arranges for Acom to pay for a fancy garden office so she can work at home. It pays £25,000 for the installation. The taxable benefit is 20% of this, i.e. £5,000 each year. Assuming the structure is used for 15 years Carol will be taxed on a whopping £75,000. In addition, 


Tax on dividends

Before we look at how you can use dividends in an especially tax-efficient way, we need to set out the ground rules. A company can pay dividends as and when its directors and shareholders decide, as long as it has accumulated profits equal to or greater than the dividend it intends to pay. The timing of dividends and whether they are “interim” or “final” can be important as this determines when the tax on them, if any, is payable.


Interim dividends

Interim dividends are taxable when they are paid. Payment is treated as made when the shareholder is entitled to take the money. For example, a dividend counts as paid if and when it’s credited to your director’s loan account (DLA). An interim dividend can usually be approved by a resolution made by the company’s board.


Final dividends

Final dividends are those recommended following or in conjunction with the approval of a company’s annual accounts. They are treated as paid for tax purposes on the date that the shareholders approve the dividend by resolution.


Retrospective tax savings

A dividend paid on or before 6 July 2024 can be used to prevent the tax and NI charges on a benefit in kind for the 2023/24 tax year.


Example. In June 2023 Acom provided Harry, one of its director shareholders, with a benefit in kind. The cost to Acom was £10,000. For the type of benefit provided, this is also the taxable amount. The benefit would usually need to be reported to HMRC on form P11D by 6 July 2024. Acom’s accounts to 1 March 2024 included a recommendation for a special dividend (this could be a final or interim dividend). Harry’s dividend entitlement is £15,000. By agreement, Acom credits the £15,000 to Harry’s DLA and immediately debits it with £10,000 which is used to “make good” the benefit.


Tip.

Making good a benefit involves the recipient paying the provider (in this example, Acom) cash. The taxable amount of the benefit is reduced by the amount made good.


Tip.

A benefit that has been wholly made good doesn’t have to be reported on Form P11D.

Trap.The taxable amount of some types of benefit, e.g. company cars and low-interest loans, can only be reduced if the employer requires or permits making good. Also, the deadline to make good benefits that have been taxed through PAYE (payrolled) is in effect 6 April and not 6 July.


Tax advantages

There are two tax advantages possible from making good. The first is a small tax saving. For example, Harry would save tax of around £300. The second tax advantage is that the tax payable on the dividend Harry uses to make good the benefit won’t be payable until 31 January 2026, whereas the tax on the benefit would have been payable at least a year earlier.

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