Are you making the most of the £2,000 dividend allowance?

This allowance, is actually a zero-rate band which applies to the first £2,000 of taxable dividend income for 2021/22 meaning you can take £2,000 of dividend income in the tax year, tax-free.

You could also make a spouse or civil partner a shareholder in the personal or family business to take advantage of their dividend allowance too giving an additional £2,000 tax free.

Dividends must be paid in proportion to individual shareholdings. This is unless you use an alphabet structure for shares. Alphabet structures are different classes of shares, very often set up as ‘A’ shares, ‘B’ shares or ‘C’ shares for example.

When using this structure, you have the flexibility to pay different dividends to different shareholder classes.

FOR EXAMPLE

Brenda owns her own consultancy business. She is married to Mark who is the sales director of the firm, who takes a salary of £80,000. Brenda holds 100 ordinary shares whilst Mark holds 100 A ordinary shares.

Brenda declares a dividend of £2,000 for A ordinary shareholders (Mark). This means that it is possible to utilise Mark’s dividend allowance and extract profits from the company without any further income tax liability.

If Brenda has already received dividends, utilising her allowance, by paying £2,000 of dividends to Mark instead of further dividends to herself will save tax at either 7.5% if Brenda is a basic rate taxpayer or at 32.5% if she is a higher rate taxpayer.

This approach can also apply to other family members to ensure their dividend allowance is not wasted and enable more post-tax profits to be extracted tax-free.

From April 2022

It is worth noting here that from 6 April 2022, the tax rate applied to dividend income will increase by 1.25% across the tax bands. From this date the basic rate of tax will be 8.75%, 33.75% for higher rate and 39.35% for the highest rate.

Currently, dividends are taxed on basic rate taxpayers at 7.5%, on higher rate taxpayers at 32.5% and the highest rate taxpayers are taxed at 38.1%. These increases will affect all UK taxpayers.