The Dividend Allowance was introduced in April 2016 and it allows you to take £5,000 in dividends tax free.
As announced at Spring Budget 2017, the government will legislate in Finance Bill 2017 to reduce the tax-free allowance for dividend income from £5,000 to £2,000.
So in 2016/17 and 2017/18 you need to take the £5,000 because in 2018/19 its dropping to £2,000 and most people expect it to disappear in 2019/20.
Dividends above the allowance are taxed as follows:
- 7.5% on dividend income within the basic rate band
- 32.5% on dividend income within the higher rate band
- 38.1% on dividend income within the additional rate band
What are the requirements for a legal dividend?
Companies Act 2006 Section 830 – Distributions to be made only out of profits available for the purpose
(1)A company may only make a distribution out of profits available for the purpose.
(2)A company’s profits available for distribution are its accumulated, realised profits, so far as not previously utilised by distribution or capitalisation, less its accumulated, realised losses, so far as not previously written off in a reduction or reorganisation of capital duly made.
(3)Subsection (2) has effect subject to sections 832 and 835 (investment companies etc: distributions out of accumulated revenue profits).
A distribution must be justified by
- The Company’s last published accounts
- Interim Accounts
- Initial Accounts
In small businesses having the right paperwork is vital should HMRC raise any questions, you will need:
- Board Minutes
- Dividend Vouchers