This tax year is about to come to an end on the 5th of April so now is the perfect time to make the most of the 0% tax rate on dividends up to the higher rate tax threshold.
Next tax year the treatment of dividends is changing, you only get £5,000 dividends tax free and the remaining amounts then incur a tax charge.
Under the current system you don’t pay any tax on dividends until your earnings are above £42,385. As such to get ahead of the changes coming in next week now is the time to take advantage of the current rules to extract the maximum profit from your company in the most tax efficient manner.
If you run an owner managed business and your total earnings including your salary are below £42,385 for the current tax year then now is a good time to declare a dividend to bring your earnings up to the higher level.
Declaring your Dividends
In order to do this you first need to ensure that there are sufficient reserves in order to pay a dividend. To check this go into Xero and under the report tab select “Balance sheet” – if you look in the reserves section of the balance sheet you will then be able to see the amount of profit reserves available for distribution. If this amount is above the dividend you would declare then you are able to declare a dividend.
Do I have to pay the cash out now?
No, you don’t need to pay the cash out of the business now. You do however need to ensure that you have declared the dividend before the end of the year (ie. now) and prepared and signed divided minutes and vouchers to support this.
If you have done this then you can simply transfer the cash out of the business as and when you can even if this is at a later date.
If you would like us to check the amounts for you or to give you some advice on what is the best solution for your business drop us an email of give us a call.