In some industries business profits are volatile, you might be a higher rate tax payer one year and a basic rate tax payer another year. Let’s say you want to take all profits out of your company and in Year 1 your business earns £50,000 but in year 2 it earns only £20,000. You probably don’t have the crystal ball to know this but let’s assume it nonetheless.
You can time your dividend payments to smooth your earnings so that you effectively earn £35,000 in year 1 and £35,000 in year 2. This is because income tax is incurred when you pay yourself a dividend not when the company earns a profit.
There are two ways you can achieve this:
Move on to part 5 of our Dividend Guide to learn how to avoid paying yourself an illegal dividend.