For business owners and directors, dividends are often a key part of tax planning, helping keep your tax liabilities in check. A typical tax-efficient approach combines:
Dividends are particularly attractive because they are taxed at lower rates than income. The current rates are:
Many business owners opt for a low salary alongside dividends to stay within the Basic rate and minimise taxes.
Will dividend taxes change?
Dividends have been in the sights of HM Revenue & Customs (HMRC) for a while, with the tax-free allowance shrinking from £5,000 in 2016/17 to just £500 in 2024/25.
Although the Government has pledged not to raise Income Tax, it may look to wealth taxes in the upcoming Autumn Budget, which could include dividend taxes. Potential changes could involve:
Should you adjust your strategy?
If you currently use a low salary and dividends to extract profit tax-efficiently, this is likely still a solid approach, assuming dividend tax rates do not change.
Even without a tax-free allowance, dividends are still taxed at lower rates than salary.
With that being said, if dividend tax rates rise, your tax bill could jump too.
In that case, you might want to consider alternative options, like making more pension contributions, if you have not yet maxed out your tax-free allowance.