As a business owner, managing your income well is vital for sustaining both your business’s health and your personal finances.
Recent changes to the dividend tax allowance have led to a significant increase in the number of individuals now paying dividend tax.
To reduce your tax liability and improve your financial strategy, it is important to understand these changes and adjust your approach accordingly.
Dividend tax changes in recent years
In April 2023, the Government reduced the tax-free dividend allowance from £2,000 to £1,000, and a further reduction to £500 followed in April 2024.
These cuts mean that the number of people paying dividend tax has increased, leaving business owners with less room to manoeuvre when it comes to tax planning.
With the allowance now at £500, many business owners who previously enjoyed a buffer are finding themselves liable for dividend tax.
With this in mind, it is more important than ever to focus on tax planning to minimise your exposure and make the most of the available allowances.
Tips for minimising dividend tax liability
Optimise your salary and dividend mix
One of the most effective ways to manage your tax liability is to carefully balance your salary and dividend income.
While dividends are taxed at a lower rate than salary, the reduction in the tax-free allowance makes it crucial to calculate the most tax-efficient mix.
Consider taking a lower salary up to your personal allowance (£12,570 for the current tax year) and supplementing your income with dividends up to the basic rate threshold.
If you don’t need to draw all available dividends, consider leaving them in the business.
Not taking dividends when they aren’t needed is an effective strategy, as it means you won’t be taxed on income you haven’t received.
However, the best approach will depend on your specific circumstances. Striking the right balance between salary and dividends requires careful planning.
Contact us today, and we can help you create a strategy that optimises your income and minimises your tax liability.
Plan dividend distributions around tax thresholds
