Should You Pay a Dividend Before the Tax Year Ends?

If you own a personal or family company, reviewing your dividend strategy before the 2024/25 tax year ends is wise. Evaluating whether to pay a dividend before 6 April 2025 can help you maximize tax efficiencies and make the most of available allowances.

Check for Sufficient Retained Profits

Dividends can only be paid from a company’s retained profits—post-tax earnings after paying corporation tax. Before declaring a dividend, ensure your company has enough retained profits to support the payment legally.

Make Use of Unused Dividend Allowances

If shareholders have not fully utilized their dividend allowances for the 2024/25 tax year, it is generally beneficial to pay dividends—provided there are sufficient retained profits. For 2024/25, the dividend allowance is £500 per individual, irrespective of their tax rate.

Dividends fall on top of other income for tax purposes. No tax is due on dividends within the allowance, but the allowance still reduces the available tax band. In this sense, it acts like a zero-rate band rather than a genuine tax-free amount.

For companies with multiple shareholders, having an alphabet share structure (where each shareholder holds a unique class of shares, such as A ordinary shares, B ordinary shares, etc.) allows you to customize dividend payments to match each shareholder’s available allowance. Without this structure, dividends must be paid in proportion to each shareholder’s stake.

Utilize Unused Personal Allowances

While paying a salary up to the personal allowance is usually more tax-efficient, shareholders who do not draw a salary or do not work for the company may still have unused personal allowances. Paying dividends to utilize their remaining personal allowance can be a tax-efficient way to extract profits, as no further tax is due on dividends covered by this allowance.

Consider the Basic Rate Band

If shareholders have unused portions of their basic rate band for 2024/25 and require funds, paying a dividend before 6 April 2025 may be beneficial. Dividends within the basic rate band are taxed at 8.75%. If these dividends are delayed until the 2025/26 tax year and push the shareholder into a higher bracket, they may face the upper dividend rate of 33.75% or the additional rate of 39.35%.

When to Leave Profits in the Company

If shareholders have already exhausted their dividend allowance and personal allowance, and the funds are not needed immediately, leaving the profits in the company might be the better option. Paying a dividend before 6 April 2025 will result in a corresponding tax liability.

Final Thoughts

Reviewing your dividend strategy before the tax year ends can help you take advantage of unused allowances and lower tax rates. Ensure your company has sufficient retained profits and assess each shareholder’s tax position to make an informed decision on whether to distribute dividends before 6 April 2025.

Partner note: ITA 2007, s 8, 13, 13A.

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