Smarter accounting

Declare your dividends

24 March 2022, Advocates, Artists, Barristers, Companies, Creative Industries, Employer, Musicians, Sole Traders

The Spring Statement 2022 confirmed increases to National Insurance from the tax year starting 6th April 2022.  The threshold for paying National Insurance increases to £12,570 from July, but this doesn’t affect the additional tax on dividends.  The difference in the payment date of your dividends by just one day could mean that you pay an extra 1.25% tax next year.

Health and Social Care Levy

What do I need to declare dividends?

If you are a shareholder of your own company you can extract profits from the business in the form of dividends.  Dividends are paid to all shareholders of the same class of shares.  The key thing you need to do before you declare your dividends is to bring your company accounts up to date and include a provision for Corporation Tax.

Dividends are paid out of post tax profits.  The profits can be accumulated from previous years so even if you made a loss this year, you might be able to declare dividends in the current year.

What documents do I need?

You will need to have a record of management accounts showing sufficient realised post-tax profits for the total dividend you declare.  You will also need board minutes or a shareholder resolution to approve minutes and a dividend voucher for each shareholder.  It is important to have all these documents before you pay a dividend to prevent any challenge from HMRC and to comply with company law.

Dividend tax rates

The Income Tax Act 2007 introduced 4 rates of tax on dividends including a NIL rate.  The NIL rate is known as the dividend allowance.  The dividend allowance for the tax year ending 5th April 2022 is £2,000.  This means you don’t pay any tax on the first £2,000 of dividends in the tax year.

The rate of tax you pay on your dividends depends on the rest of your income.  If you are a basic rate taxpayer you will pay 7.5% tax on dividends this year increasing to 38.1% if you reach the threshold for the additional rate.  The additional rate of tax applies when your taxable income reaches £150,000

The tax on dividends will increase from 6th April 2022 as shown below.

Tax Band - year ending5th April 20225th April 2023
Nil rate up to £2,0000%0%
Basic Rate7.5%8.75%
Higher Rate32.5%33.75%
Additional Rate38.1%39.35%

What else can I do about the tax increases?

  • Make sure you have up to date accounts during March so you can calculate the maximum dividend you can pay in the 2021-22 tax year.
  • If you are a sole trader and have a choice between cash and accruals accounting, consider accruals accounting so you can increase your income with Work in Progress and shift more earnings into the current year with the lower rates of National Insurance.
  • Consider making pension contributions before 6th April.  If you don’t have a pension scheme get one set up.  Even if you only pay in £1 this year, it can help you in the future to carry forward your remaining pension allowance of up to £40,000.

If you don’t already have Xero accounting software and Xero Gold Partner as your accountant, contact Alterledger on the form below and let us help you get the clarity you need on your accounts.

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