Paying dividends out of your company is something that you will start to do routinely when the business is making enough profit. However getting the timing of these dividends right, or rather wrong could cost you dearly when it comes to your tax bill.
Business owners often decide to declare a dividend at the start of a calendar month. There is nothing wrong with this practice at all except for exercising caution during one month of the year being April.
The importance of tax years comes into its own here. It’s worth remembering that the tax year finishes on 5th April. Dividends get included on the self assessment tax return, for the calculation of the amount of dividend tax to pay, based upon the tax year in which they fall. This means that the tax return includes dividends paid from the 6th of April to the 5th of April each year. Making a dividend payment on or after 1st April and before 6th April could mean a higher tax bill than anticipated if you think that dividend will be the first one in a new tax year and not the last one in the old tax year.
The best advice is to be careful around the timings of dividend payment around the beginning of April and, if in doubt about the tax implications, get advice from your accountant before you take the money out of the business.
It’s worth remembering that dividends cannot be declared or paid retrospectively. So reviewing your dividend position regularly and at least in March, before the end of the tax year, is important. The company’s accounting year is less important when it comes to dividends. Obviously you do not have to wait until you have your annual accounts to declare dividends as the amount available to distribute should be shown in your up to date accounting records.
You can declare a dividend on a certain date to be paid later but for one person businesses it is much easier to declare and pay the dividends on the same date and record these as such in the accounting records. That way there is no dispute as to which tax year they were in. The accounting records reflect exactly what has happened.