Dividend Tax

1 day to delay tax by 12 months

What is the issue?

Dividends are generally taxable on the date they were received.

This sounds simple, but if the tax rate changes this can be vital to avoid overpaying tax.

For example, a dividend was received on the 5th April 2020, then the tax on it is due on the 31st January 2021. However, if the dividend was paid a day later on the 6th April 2020, then the tax would be due on the 31st January 2022, an entire year later.

This is only one of the nuances of taxing dividends. There are also differences between interim and final dividends.

Interim and Final dividends?

Interim dividends are taxable when they are placed at the disposal of the shareholder. This could be when they are paid, or when they are credited to a loan account.

If the director wants to delay the tax point on these dividends, they should not be paid or accounted for until the desired tax point.

If short-terms funds are required then these should be done through the Director’s Loan and then the dividends can be set against this at the desired tax point.

Final dividends are due and payable when they are approved. This can provide an unexpectedly short tax point for some directors.

This can be avoided, if a payment date is specified in the minutes, as it would not be “due and payable” until that date.

Directors should become familiar with dividends and the associated paperwork, as HMRC could ask to see this to prove the tax has been paid in the correct year.

Although it all sounds confusing, and might require consultation with your accountant, this could help to avoid an unexpected tax bill, especially if the tax rates go up.