If you are a business owner, dividends could be an effective way to extract value from your company and pay yourself some additional income.
This could be beneficial as you pay Dividend Tax at a lower rate than Income Tax. Additionally, there are no National Insurance contributions (NICs) to pay on dividends. As a result, you might pay less tax if you generate some of your income from dividends.
However, upcoming changes to tax legislation could mean that your tax bill increases if you receive dividends from your business or non-ISA investments. Fortunately, they may still be more tax-efficient than paying yourself a salary, in some cases, but it is important to fully understand the changes.
Read on to learn why you might pay more tax on dividends in 2024.
The Dividend Allowance will fall to £500 on 6 April 2024
Typically, you do not pay tax on any dividend income that falls within your Personal Allowance of £12,570 in the 2023/24 tax year. You also benefit from a tax-free “Dividend Allowance” of £1,000 in 2023/24.
Any dividend income from business interests or non-ISA investments that exceeds this threshold is potentially subject to tax, and how much you pay depends on your marginal rate of Income Tax. You may pay:
- 8.75% if you are a basic-rate taxpayer
- 33.75% if you are a higher-rate taxpayer
- 39.35% if you are an additional-rate taxpayer.
For example, if you have already used your Personal Allowance and receive £20,000 in dividend income, you would pay tax on £19,000 in 2023/24, once your Dividend Allowance is applied.
This means a higher-rate taxpayer would pay £6,412.50 in Dividend Tax.
However, the Dividend Allowance is set to fall to £500 on 6 April 2024. As a result, using the same example as above, you would pay £6,581.25 in Dividend Tax in 2024/25.
While this is not an especially large increase, you are still paying more tax and the difference could build up over the years. For example, paying this increased amount of Dividend Tax for 10 years means that you could be £1,687.50 worse off.
Dividends could still be a tax-efficient way to extract wealth from your business
Despite the fact that the Dividend Allowance is falling on 6 April 2024, dividends may still be a tax-efficient way to extract wealth from your business compared with taking a salary.
If you are a higher-rate taxpayer, you pay 33.75% Dividend Tax while you pay 40% Income Tax and 2% NICs on your salary.
This could mean that you still pay less tax on dividends than you would on your salary, regardless of changes to the Dividend Allowance.
As a result, dividends may still help you mitigate tax when taking an income from your business. However, if you are concerned about a potential increase in Dividend Tax, you may want to consider increasing your pension contributions.
Pension contributions may be a useful alternative to dividends or a cash salary
Instead of extracting wealth through a cash salary or paying yourself dividends, you could take a portion of your salary through pension contributions. There are potential tax benefits to this and it could be an effective way to build savings for later life.
If you trade as a limited company, your pension contributions may be considered an allowable expense and could be offset against your Corporation Tax bill. You may not pay Income Tax or NICs on these payments either.
However, the contributions must meet certain pension rules for allowable deductions. For example, other employees in a comparable role must receive similar contributions to your own.
You may also receive tax relief on your pension contributions if you are a sole trader or partner.
That said, the amount you can contribute to your pension without facing an additional tax charge in 2023/24 is up to the “Annual Allowance”. This stands at up to £60,000 or 100% of your earnings, whichever is lower.
If you take a small cash salary, your Annual Allowance may be relatively low and this could limit the amount you can tax-efficiently contribute to your pension.
Additionally, your Annual Allowance may also be reduced if you are a high earner or have already flexibly accessed your pension.
As a result, it may be useful to seek advice to ensure that you are extracting money from your business as tax-efficiently as possible.
Get in touch
If you want to explore tax-efficient ways to generate an income from your business then please do get in touch with us at DBL Asset Management.
Email enquiries@dbl-am.com or call 01625 529 499 to speak to us today.
Please note
This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.
A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.
The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.
Workplace pensions are regulated by The Pension Regulator.
The Financial Conduct Authority does not regulate tax planning.
