For the last five tax years, the dividend allowance (the amount of dividend income you can earn each year without paying tax) has been set at £2,000. But from 6 April 2023 that allowance is changing.
In the 2023/2024 tax year, the dividend allowance reduces to £1,000. The following tax year it reduces further to £500.
Although this looks like a small change, it could significantly impact the amount of tax you pay on your dividends.
How much tax will you pay on your dividends?
That depends on the income tax bracket you fall into.
If you’re in the basic rate of income tax (£12,571 to £50,270) you’ll pay basic rate dividends taxed at 8.75%. If you’re a higher rate taxpayer your dividends will be taxed at 33.75%, and if you’re an additional rate taxpayer your dividends will be taxed at 39.35%
If dividends are your sole source of income, then the point at which you pay tax on your earnings is £13,570 (the £12,570 personal allowance plus the £1,000 dividend allowance).
Taking positive action
The changes in the dividend allowance can’t be changed but following these steps could help you to manage the impact:
- Talk to your accountant. We’d hope that your accountant will have flagged this change in allowances to you already. Get a meeting with them in the diary sooner rather than later to discuss the impact of this change on your personal finances.
- Forecast your predicted sales and income. Utilise cashflow forecasting reports from your accounting software or together with your accountant to build a picture of how your company is likely to grow over the next 12-18 months and what this could mean for future dividend payments. What could your tax liabilities look like?
- Review your options. We much as we’d love to give you the key to unlocking further allowances, we’re unable to without knowing the specifics of your personal circumstances. BUT good practice says to look at your income streams with a fresh pair of eyes. Just because you’ve structured your income in such a way previously doesn’t mean that it’s cost effective to continue.
Fail to prepare and you prepare to fail
Any change in tax allowances and thresholds, no matter how small, can have a big impact on the amount of income you take home. With inflation rates, increased utility costs and generally everything costing more right now, these changes can cause a lot of disruption to your personal finances and your well being.
One of the values we pride ourselves on at Accounting Clarkes is that we look after you as well as your business. We keep our clients informed of upcoming changes and help them make informed decisions to achieve the outcome that’s best for them.
If you have concerns about these changes or feel you aren’t well informed about your business finances, then we can help. Call us on 01252 612484 and we’ll find the right time to sit down and talk about your business.