Delay dividend to save tax

NB writes: I am a director and principal shareholder of a small business and I usually pay myself a mixture of salary and annual dividend from the profits. The dividend of about £20,000 is normally paid between December and March every year, and advance corporation tax (ACT) of £5,000 is normally paid. What is the effect of the abolition of ACT, and should I still be paying a dividend in the tax year ending April 5, 1999?

Answer

ACT is to be abolished for distributions after April 5, 1999. Companies making dividend payments after this date will not have to pay ACT. This will mean the company´s corporation tax liability will be higher because there will be no ACT paid in advance to be offset against it. In your situation if you were to delay your dividend payment until after April 6, 1999, the usual £5,000 payment will not be required. But the £5,000 is not saved entirely because the tax bill due nine months after the company´s year end will be £5,000 higher under the new system. You will need to consider your personal tax situation because you will be moving dividend income from one tax year to another and this may leave unused lower-rate bands or allowances in the earlier year. Companies that are going to pay an abnormally large dividend that would give rise to surplus ACT and companies that have been making losses but are still able to pay dividends from reserves will find there is a greater advantage in delaying payments. Any ACT paid now may not be recoverable, so by waiting for the new rules to take effect you could avoid having to pay any ACT at all.