If you operate your business through a personal or family company and extract profits in the form of dividends, it is prudent to review your dividend policy to determine whether it would be beneficial to pay a further dividend before the end of the 2022/23 tax year on 5 April 2023. It should be remembered, however, that dividends can only be paid if you have sufficient retained profits, and where shares of the particular class in respect of which a dividend is being declared are held by more than one shareholder, in proportion to shareholdings. Â
Paying a dividend before the end of the tax year may be worthwhile: if shareholders have unused dividend allowances or they are likely to become higher rate tax payers in 2023/24.
Utilise dividend allowances Â
All individuals, regardless of the rate at which they pay tax, have a dividend allowance. This is set at £2,000 for 2022/23. The dividend allowance operates as a zero rate band and dividends (which are taxed as the top slice of income) are tax-free to the extent that are covered by the dividend allowance. However, the dividend allowance does use up part of the tax band in which it falls. Â
If any shareholders have not fully used their dividend allowance for 2022/23, paying a dividend to take their dividends for the tax year up to £2,000 will be beneficial allowing profits to be extracted from the company without any further liability to tax. If an alphabet share structure is used, dividends can be tailored to match the unused amount of the dividend allowance; if there is only one class of share, dividends must be paid in proportion to share holdings. Â
Example Â
Fletcher Ltd is a family company in which Bertie Fletcher and his wife Jane are directors. Bertie holds 100 A Class shares and Jane holds 100 B Class shares. The couple each take a salary, which for 2022/23 is equal to the personal allowance of £12,570. In addition, the company has declared dividends of £37,700 for both A Class and B Class shareholders. Â
The couple have two sons, Chris and David. Chris holds 100 C Class shares and David holds 100 D Class shares. Chris has £1,500 of his 2022/23 dividend allowance available, while David’s dividend allowance remains available in full.  Â
To utilise the dividend allowances to extract profits free of tax, the company pays a dividend of £15 per share to C Class shareholders and a dividend of £20 per share to D Class shareholders on 30 March 2023. Chris receives a dividend of £1,500, which are covered by his available dividend allowance, and David received a dividend of £2,000, which is covered by his dividend allowance. No dividends are declared for Class A and Class B shares. Â
Beat the falling tax free dividend allowance Â
The tax free dividend allowance is due to fall to £1,000 per individual in 2023/24 and £500 in 2024/25, so accelerating a dividend into 2022/23 to fully utilise the higher tax free allowance may be beneficial.