Does Your Company Need to Declare a Dividend Before the End of the Financial Year?
For businesses operating under a company structure, one key decision to make before the end of the next financial year (31 March 2025) is whether to declare a dividend. Understanding the role of retained earnings and the tax implications will help you to decide.
What Are Retained Earnings?
Retained earnings represent the net profits a company has kept within the business rather than distributed to shareholders. Over time, this balance may increase, reflecting the company’s profitability and the decisions made about reinvesting profits versus distributing them.
What does the retained earnings balance mean for your company?
Retained earnings can be an important source of funds for reinvestment, expansion, or paying down debt. However, the decision to distribute these funds as a dividend is not always straightforward. In some cases, it might be a strategic move to reward shareholders, while in others, it may be more beneficial to retain the profits within the company for future growth.
Tax Implications of Retained Earnings and Dividends
Before declaring a dividend, it’s critical to consider the tax implications. The tax cost of declaring a company dividend includes a 5% withholding tax calculated on the gross dividend amount. Additionally, dividends paid to individual shareholders may be subject to additional personal tax, depending on the shareholder's income level and tax bracket.
Key Considerations Before Declaring a Dividend
There are several factors to consider when deciding if it’s the right time to declare a dividend:
Are you planning to close your company in the next 1-5 years? If you are considering winding up the company soon, declaring a dividend now may be a good strategy to distribute accumulated profits before closure. Looking at this now will increase the options you have to ensure the best personal tax outcome.
Do you expect your income to increase or decrease in the future? If you anticipate a higher income in the future, it might make sense to take a dividend now, when you’re in a lower tax bracket. However, if you expect your income to decrease, you may want to hold off on declaring a dividend, as you could pay less tax in the future.
How will the timing of the dividend payment affect my earnings? The timing of the dividend can have a significant impact on your personal tax situation. If you declare the dividend before the end of the financial year, it will count toward your current year’s income. Alternatively, deferring the dividend until the next financial year could allow you to take advantage of any changes in your tax circumstances.
Will I have to pay more tax if I receive a dividend from my company? Receiving a dividend could result in additional personal income tax, depending on your overall earnings. If you’re already in a high tax bracket, taking a dividend may not be the best option.
Additional Considerations
• Cash Flow Needs: Ensure that your company has sufficient cash flow to meet the demands of a dividend payment.
• Retained Earnings vs. Future Growth: Consider whether retaining earnings for future investment or expansion is more beneficial to the long-term growth of your business than distributing the profits now.
Conclusion Deciding whether to declare a dividend involves multiple factors, including tax implications, company plans, and personal financial goals. If you're unsure whether declaring a dividend is the best move for your business, book a time with us and we can help guide your decision.
