Tax-free dividend allowance - use it or lose it

Published: Tuesday 20 September 2016

Many farming businesses now operate as a limited company.  This could be alongside an existing partnership to undertake a business expansion and allow borrowings to be repaid from a lower rate of tax.  In many cases, there may be no extraction of profits from the company at the moment.

Change in taxation of dividends

From 6 April 2016, a £5,000 tax-free dividend allowance was introduced.  In addition, all dividend income is now received gross of tax with no tax credit, so even basic rate tax payers will suffer some income tax on dividend income above £5,000.

Therefore, it is likely to be tax efficient for shareholders to receive an annual dividend of £5,000, to use their annual allowance, if they have no other dividend income, and retained profits allow. Even if the dividend is not extracted from the company but remains as a loan to the company.

Pay a dividend to all shareholders?

Individuals receiving child benefit or tax credits should check how additional income may affect their entitlement to these amounts.  In addition, a tax-free dividend is unlikely to be the most effective use of a loss where an individual is claiming loss relief against total income.

Transfer of shares to a spouse

Where shares in a company are held solely by one spouse, the transfer of shares to the other spouse could be tax efficient to allow a further £5,000 of tax-free dividend income to be extracted from the company. Although it should be ensured that there is not a bigger picture in terms of the Inheritance Tax or Capital Gains Tax position that might be affected by such a transfer.