What is an Accelerated Dividend?
An accelerated dividend is an amount of money paid by a company before a forecasted change in dividends occurs. This is often a special dividend, a lump sum cash payment that is paid out when an adverse change is likely, such as a drastic change in dividend taxation.
In some cases, companies use the accelerated dividend as a strategy to educate investors about a company’s significant earnings to fuel the company’s growth. An accelerated dividend will be paid prior to the occurrence of imminent change in how dividends are treated.
- An accelerated dividend occurs when futures dividends are paid in a lump sum rather than over time.
- Companies can issue accelerated dividends prior to a change in tax policy in order to minimize the tax burden on shareholders on the dividends.
- Both the US and the UK have examples of companies paying high dividends before tax changes.
A Little More on What is an Accelerated Dividend
Accelerated dividends from US companies came to the forefront in the fourth quarter of 2012. During this time, numerous companies accelerated dividend payments before the end of the 15% preferential tax on dividend income introduced by former President George W. Bush in 2003 on December 31, 2012. Concern was that the dividend tax rate for top-income taxpayers could more than double due to the fiscal cliff.
U.S. companies scrambled to pay accelerated dividends in the fourth quarter of 2012, with the total of special dividend announcements exceeding $31 billion, an increase of more than four times the dividend payout in the same period last year. In November 2012 alone, 228 companies announced special dividends, more than three times the number of 72 companies in the previous year.
In 2016 the UK introduced a new tiered system of dividend taxation. This, too, led to accelerated dividend payments from many public and private companies.
Reasons for Accelerated Dividends
When a company pays a high dividend, this is also known as a special dividend. Such a dividend could be tied to the sale of an asset, or the company may have a lot of cash and decide to return it to shareholders.
If the company restructures or innovates that will save the company a lot of money, some of the savings (and therefore higher profits) can be passed on to shareholders in the form of a dividend.
Avoiding Liabilities Caused by an Accelerated Dividend Payout
1. Pension contributions
One way to avoid the tax debt by paying an accelerated dividend is to make pension contributions. Many people find pension contributions an attractive alternative to high tax rates on dividends, as they allow individuals to divert a large portion of their income into a tax-free account. The taxation of pension income upon payment is based on the old tax rates.
2. Gift aid payment
Another way to avoid high tax rates is through gift grants. Gift payments help expand the income tax policy tape for individuals. The only condition is that payments must be made in the year before the dividend is paid out.
Since the new tax rate would come into effect in April 2016, all gifts would have to have been made before the due date in order to receive tax relief and to expand the basic tax band.