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A leading accountancy firm says that many limited company directors are putting dividend payments on hold until the controversial top rate of tax is cut from April 2013.

Top 25 firm, Wilkins Kennedy, says that many owner-managed limited companies and other small firms are limiting the amount of dividends they distribute in order to prevent shareholders from hitting the current additional rate income tax band, which applies to income in excess of £150,000.

Dividend tax rate cut from April 2013

From April 6th 2013, the additional rate of income tax will be cut from 50% to 45% - the most controversial measure announced by George Osborne in the last Budget.

The headline additional dividend tax rate will fall from 42.5% to 37.5%, however the effective tax rate (which takes into account the 10% tax credit which applies to all UK company dividends) falls from 36.11% to 30.56% for all income over the £150,000 level.

Although delaying dividend payments is likely to take place in private companies, the accountancy firm says that the trend could also spread to AIM-listed firms that have a low proportion of institutional investors.

Dividend tax planning

Clearly, for successful limited company contractors who extract large amounts of dividends, the tax savings you can achieve by putting off significant dividend declarations until 2013 can be significant.

Jeremy Newman, Tax Director of the accountancy firm confirmed that "this is a simple straightforward and legitimate tax mitigation strategy which if done correctly, HMRC should have absolutely no issue with."

For further information, read our guide to limited company dividend taxation.