If you’re already a higher rate taxpayer the problem with taking an extra dividend is that you pay higher rate tax on it (25% of the dividend you take!), yet fellow shareholders may have no tax to pay. How can you use this to your advantage?
When a company pays a dividend, all the shareholders receive a dividend in proportion to their shareholding. It’s a case of all or nothing. Plus, under present rules, anyone liable to the higher rate of tax suffers an additional income tax on dividends, the so-called “Schedule F upper rate”.
Example: John and his wife Mel each own one share in Fantasy Ltd (the company only ever issued two shares). Currently, Fantasy Ltd can afford to pay a dividend of £20,000. John already takes a salary from another company which is sufficient to put him in higher rates of income tax but Mel is between jobs. (Although she does have profits from rental income of about £5,200pa.) John will pay an extra £2,500 in income tax on his share of the dividend while Mel will pay none.
The Solution: If the dividend of £20,000 is voted and paid but John waives his right to his share, it all (£20,000) goes by default to the other shareholder, Mel. She still has no extra tax to pay on this £20,000 dividend as her total income is within the lower rate tax band of £34,600. Overall, Fantasy Ltd is in the same position and the family is £2,500 better off – the tax that John would have paid without the waiver. Tax saved £2,500. Is it really that simple?
The Admin Required (Sapphire’s Specialism!)
Tip 1. Put the waiver in place before the right to the dividend arises or it won’t work. A final dividend becomes payable once it is approved in an Annual General Meeting, however the deed has to be in place well before then. Any interim dividends must be waived before they are paid.
Tip 2. Use a formal deed to effect the waiver. It’s not a complicated document (Sapphire can help you with this) and it should be formally witnessed.
Tip 3. Have genuine commercial reasons for waiving dividends. This is to avoid the Taxman treating it as some sort of ‘bounty’ or gift out of income and so taxable on the shareholder waiving the dividend.
For example, a board minute saying that “A car is required in order for one shareholder director (Mel) to provide new/better service for existing clients. In fact her current lack of mobility is seen as holding back the company’s growth. However, following a brief discussion it was decided that this car should be bought outside the company so as to save on the employers’ NI associated with a company car of the director’s particular preference. At this point in the meeting (John) the other shareholder director volunteered to waive his dividend in order to allow sufficient funds to be extracted (by Mel) to purchase said vehicle privately. This was on the sole condition that growth in new business could be seen to be achieved”.
Tip 4. Don’t be greedy. Don’t waive every year as it’s too obvious to the Taxman what you are doing. Use this tax avoidance tactic selectively.
Waiving your right to a dividend can save you higher rate tax. But the waiver must be a legal document and in place before the dividend is paid. Use this tactic sparingly to avoid unwanted attention from the Taxman.