What directors can do before the end of the tax year to reduce the tax bill on dividends withdrawn and warns of a timing trap?

It has taken a long time; but from 6 April 2023, the rate of tax on dividends will increase such that there is now near parity between taking a salary versus dividends. As of that date, the additional rate of income tax will apply to income above £125,140 (45% tax rate for most income) rather than starting at £150,000. At least the chancellor left the dividend tax rates alone at:

  • The basic Rate is 8.75%
  • The Higher Rate of 33.75%
  • The Additional Rate of 39.35%

Which tax year?

The change in tax band level means that some directors may find themselves slipping into the higher tax rate band after the change date, whereas they may have been basic rate taxpayers before the change. This may be particularly relevant should the director have other income which then pushes a dividend into a higher-rate tax band, as dividends are generally taxed at the highest band of income. In such circumstances, the changes may bring with them a ‘one-off’ opportunity for tax planning with the bringing forward of dividend payments to 2022/23 rather than 2023/24. Any tax due will be accelerated as well, but this might be worthwhile to save the tax.

Timing trap

Even if the company’s year-end is after 5 April 2022, the company’s directors can vote for an ‘interim’ dividend on (say) 31 March 2022, which will be regarded as being taxable when actually paid, namely in the tax year 2021/22. A final dividend normally being regarded as ‘due and payable’ (and so taxable) when it is declared, rather than when actually paid.