With the budget today shareholders minds will turn to whether to “bank” a dividend based on the 2015/16 income tax rates or defer taking a dividend until after April 6.

This is always a fine balancing act and not necessarily tax driven. But this year with the change in the way dividends are taxed makes the contrast even starker.

A common strategy for many owner managed companies has been to draw a salary of around £8,000 a year and extract sufficient profits from the business in the form of a dividend, the salary being sufficient to preserve their state pension but saved on national insurance for both the individual and the company.

At that level of income potentially a basic rate tax payer did not pay any income tax on the dividend. Higher rate tax payers only paid an effective tax rate of 25% and those with incomes over £150,000 30.6%.

It was often the practice to defer dividends to the following tax year (after April 6) to delay the payment of any income tax due.

With the change in taxation of dividends coming into effect from April 6, 2016 should shareholders continue with that practice?

From April 2016, the 10% dividend tax credit will be replaced with a new dividend tax allowance of £5,000 per year. This allowance will not reduce total income for tax purposes and will only apply to dividend income.

Dividend income exceeding the £5,000 allowance and the personal allowance for income tax will be taxed at basic rate taxpayers: 7.5%, higher rate: 32.5% and additional rate: 38.1%.

The £1,000 savings allowance (£500 for higher rate taxpayers) due to come into effect in April 2016 excludes dividend income.

Paying a dividend before 5 April to avoid the increase in tax is therefore potentially attractive but would mean accelerating the payment of any resulting income tax by a year.

In the situation where the dividend is really replacing remuneration then accelerating the payment of a dividend may be only a timing benefit comparing the cost of paying the tax early to the slightly higher rate payable if the dividend is deferred. The decision will be based mainly on the personal circumstances of the individual shareholder and their other sources of income and therefore the decision needs careful consideration.

We can explain how changes to dividends will affect you. Please contact Alastair Byrne on 01904 717260 or ajb@jwpcreers.co.uk