Dividend Tax Saving Strategies Explained

Released July 2017

Used correctly, the withdrawal of monies from a private limited company via the use of dividends can form the basis of an effective tax planning strategy for the directors...

This guide considers the practicalities involved, with examples and practical tips where relevant.

Contents Include:

1. Dividend Payments

1.1 Methods Of Cash Withdrawal

1.2 Dividends

1.3 The Taxation Of Dividends

1.4 Types Of Dividend

1.5 Method Of Dividend Payment

1.6 Payment Dates

1.7 The Dividend Counterfoil

1.8 Bookkeeping Entries And Uncashed Dividends 

2. ’Legal’ And ‘Illegal’ Dividends

2.1 Directors’ Entitlement To Dividends

2.2 The Company Must Be In Profit

2.3 ‘Illegal’ Dividends 

3. Tax Planning

3.1 Reasons Not To Withdraw A Dividend

3.2 Practicalities Of Dividend Waivers

3.3 The 'Settlement' Provisions And Dividend Waivers

3.4 'Alphabet' Shares

3.5 The ‘Settlement' Provisions And 'Alphabet' Shares

3.6 Alphabet Shares And Capital Gains Tax (CGT)

3.7 Compliance

4. Salary v Dividends - Which One Or Both?

4.1 Salary

4.2 How Much Salary To Pay?

4.3 Dividends

4.4 How Much Dividend To Pay?

5. Using A Director’s Loan Account ‘Correctly’

5.1 Reminder: Methods Of Extraction

5.2 Use Of A Director’s Loan Account (DLA)

5.3 The Overdrawn DLA

5.4 Anti Avoidance Rules

5.5 HMRC’s DLA ‘Toolkit’ 

6. Share And Share Alike! Bonus Issues

6.1 Bonus v Rights Issue Of Shares

6.2 Why Are Bonus Shares Issued?

6.3 Bookkeeping Entries

6.4 Implications Of A Bonus Issue

6.5 Legal Procedure 

7. Traps To Avoid

Trap 1 - Timing Of Payment

Trap 2 - Distributable Profits Must Be Available

Trap 3 - National Insurance Contributions

Trap 4 - Dividends = Salary?

Trap 5 - Diverting Dividends - A ‘Settlement’?

Trap 6 - Be Aware Of Statutory Requirements

Tax Insider