As previously reported from 6 April 2016, dividends of up to £5,000 can be received tax free. It doesn’t matter what rate of tax the individual pays on their other income, the first £5,000 of dividend income will be taxed at 0%. However, it should be noted that Estates of deceased persons are not entitled to the dividend allowance which may create problems for executors in the future.
This tax-free slice of income can be exploited within family companies by paying small dividends to the spouse, adult offspring, or other relatives of the company owner. However, individuals can only receive a dividend from the company if they hold a share which entitles them to receive the dividend.
It is therefore really important to follow the correct company secretarial procedures when issuing shares and paying dividends.
If you would like to discuss this, contact Andrew Wilson, Partner on 01788 539000.