Should you pay a dividend before 6 april 2022

As the end of the tax year approaches on 5 April 2022, many business owners find themselves considering whether to declare a dividend before the deadline. It’s a question that merits careful thought, as the timing of dividend payments can have meaningful implications for your tax position. At Severn Accounting, we’ve helped numerous Worcester-based directors navigate this decision, and we’d like to share some key considerations to help you make an informed choice.

Understanding the dividend allowance

The dividend allowance is a crucial starting point in this conversation. For the 2021/22 tax year, you can receive up to £1,000 in dividends without paying any tax on them. This applies regardless of your income tax band. However, once you exceed this threshold, dividends become taxable at rates that vary depending on your overall income.

If you’re a basic rate taxpayer, dividends above the allowance are taxed at 7.5%. For higher rate taxpayers, the rate jumps to 32.5%, and additional rate taxpayers face 39.375%. These rates are considerably lower than income tax rates on salary, which is why many business owners consider dividends as part of their tax planning strategy.

The corporation tax perspective

Before declaring a dividend, it’s essential to consider corporation tax. Your company pays corporation tax at 19% on profits before dividends are distributed (though this rate is set to rise to 25% from April 2023 for larger companies with profits exceeding £250,000). This means that to pay yourself a £1,000 dividend, your company needs to generate approximately £1,235 in pre-tax profit.

The combined effect of corporation tax and dividend tax can actually result in a higher overall tax burden compared to taking salary, depending on your circumstances. This is why many directors use a combination of salary and dividends to optimise their tax position. However, timing a final dividend before 6 April could still be beneficial if it means spreading your income tax liability across two tax years.

Practical considerations and timing

Declaring a dividend before 6 April 2022 means it must be formally recorded in your company records before that date, even if you don’t actually receive the money until later. You’ll need to document the dividend payment in the minutes of a directors’ meeting and ensure your accounts reflect the decision.

One significant advantage of paying a dividend before the year end is that it can reduce your company’s retained profits, which affects your corporation tax bill. If you’re concerned about building excessive retained reserves, a timely dividend distribution can address this whilst providing you with a personal tax-efficient withdrawal.

However, don’t let the calendar pressure you into a decision that doesn’t suit your cash position. A dividend must be paid from available profits—either current year earnings or accumulated reserves. Declaring a dividend you can’t afford to pay puts your company in breach of company law and could create serious difficulties with HMRC.

The self-assessment angle

From a personal tax perspective, any dividends you receive in the 2021/22 tax year must be reported on your Self Assessment tax return by 31 January 2023. If you’ve already received dividends earlier in the year, adding a further dividend before 6 April might push you into a higher tax band, negating some of the benefits.

It’s worth reviewing your total income from all sources—salary, other employment, savings interest, and existing dividends—to understand where you sit relative to the basic rate (£50,270) and higher rate (£125,140) thresholds. This calculation should inform your dividend strategy.

Making your decision

Ultimately, whether to pay a dividend before 6 April 2022 depends on several interconnected factors: your company’s profit position, your personal tax circumstances, your cash flow requirements, and your broader business plans. There’s no one-size-fits-all answer, which is precisely why seeking professional guidance is worthwhile.

We’d recommend reviewing your position with an accountant before the deadline. A few hours of consultation now could save you considerable tax and prevent costly mistakes. If you haven’t already filed your accounts or considered your dividend strategy, there’s still time to act.

For tailored advice, contact Severn Accounting — we’re here to help.