Should we pay a dividend before the end of the tax year?
If you are the owner of a personal or family company, it is prudent to review your dividend strategy before the 2024/25 tax year comes to an end as assessing whether paying a dividend before 6 April 2025 would be beneficial. Many business owners overlook this straightforward planning opportunity, yet it can result in meaningful tax savings and improved cash flow management. This article explores the key considerations you should weigh up before making your decision.
Understanding the Dividend Allowance
The dividend allowance of £1,000 per tax year is one of the most valuable planning tools available to company shareholders. This means the first £1,000 of dividend income you receive is tax-free, regardless of your other income. If you haven’t already used this allowance in the 2024/25 tax year, paying a dividend before 6 April 2025 allows you to take full advantage of it.
Beyond the allowance, dividend tax rates depend on your overall income. Basic rate taxpayers pay 8.75% on dividends, higher rate taxpayers pay 33.75%, and additional rate taxpayers pay 39.35%. If you’re close to the basic rate threshold (£50,270 for 2024/25), timing a dividend payment carefully could keep you in the lower tax bracket and result in material savings.
The Corporation Tax Perspective
Before dividends can be paid, your company must have sufficient profits and retained earnings. Corporation tax for the 2024/25 tax year is charged at 19% for profits up to £50,000, and 25% for larger companies (with marginal relief available between £50,000 and £250,000 of profits).
It’s essential to understand the combined impact: your company pays corporation tax on profits, then you pay dividend tax on the dividend itself. However, this “double taxation” is mitigated by the dividend allowance and lower dividend tax rates. Importantly, dividends must be formally declared by your board and paid from profits that have already been taxed by HMRC. Simply withdrawing cash from your company without a proper dividend declaration can be challenged by HMRC and treated as salary, which has different consequences.
Cash Flow and Company Reserves
Before declaring a dividend, ensure your company has sufficient cash reserves to cover:
- Operating expenses and working capital for the months ahead
- Loan repayments and other obligations
- VAT, PAYE, and Corporation Tax liabilities
- Planned investments in equipment or stock
Over-distributing profits can leave your business vulnerable if unexpected costs arise. As accountants, we often see businesses stretch themselves by declaring dividends too hastily. A prudent approach balances shareholder reward with business resilience.
Salary vs. Dividend Considerations
If you haven’t yet paid yourself through salary, you should consider whether a dividend is the right route. The optimal mix of salary and dividend depends on individual circumstances. Many sole shareholders opt to take a modest salary (around £12,570, the personal allowance threshold) alongside dividends, as this can be more tax-efficient than taking all income as dividends.
Additionally, salary contributions count towards your National Insurance record and your State Pension entitlement, which dividends do not. This is worth considering if you’re in the early stages of building your record.
The Deadline and Practical Steps
The tax year ends on 5 April 2025. To be treated as paid in the 2024/25 tax year, dividends must be formally declared and actually paid by this date—having a board resolution is not enough without the money changing hands. If your accounting year runs on a different cycle, coordinate with your accountant to ensure dividends are processed within the correct tax year.
You’ll need to notify HMRC of any dividends received when filing your Self Assessment tax return, which is due by 31 January 2026 for the 2024/25 tax year. Your company must also maintain a dividend register and issue dividend vouchers (or statements) to shareholders.
Taking Action Now
The window to optimise your dividend strategy for 2024/25 is closing. A few minutes spent reviewing your position now could spare you unnecessary tax liability in a few months’ time. Consider your personal tax position, your company’s cash reserves, and your business plans for the year ahead.
For tailored advice that takes into account your specific circumstances, contact Severn Accounting—we’re here to help.