Does the £5k dividend allowance consume any of the basic rate band?

[booms]

Hi all,

I’ve seen some conflicting information about this – probably from when the £5k dividend allowance was first announced – so I just want to make sure I understand.

I’ve come from a permie job, and I’ve used up almost all of my basic rate band for the tax year already with the pay from that.

If I my company gives me a £5k dividend will that ‘use up’ any of my basic rate band? If so it would push almost £5k of my income into the 40% band.

Or is the £5k dividend allowance always independent of everything else, and should always been taken?

I don’t really need the money – just want to make sure I’m doing the most tax-efficient thing.

[northernladuk]

I'll get roasted for this but you should really be having a long chat with your accountant about this. They can spend time with you and give you the full picture which will be much more useful than answers to the odd question on here.

[LondonManc]

I'll get roasted for this but you should really be having a long chat with your accountant about this. They can spend time with you and give you the full picture which will be much more useful than answers to the odd question on here.

I think you're dead right though; given that the OP is part way through a year, their accountant will be best placed to tell them what they can and cannot take at this point in time.

[diseasex]

Hi all,

I’ve seen some conflicting information about this – probably from when the £5k dividend allowance was first announced – so I just want to make sure I understand.

I’ve come from a permie job, and I’ve used up almost all of my basic rate band for the tax year already with the pay from that.

If I my company gives me a £5k dividend will that ‘use up’ any of my basic rate band? If so it would push almost £5k of my income into the 40% band.

Or is the £5k dividend allowance always independent of everything else, and should always been taken?

I don’t really need the money – just want to make sure I’m doing the most tax-efficient thing.

It's dividend allowance.
Which means it's DIVIDEND allowance
If you get dividends from stock market AND from your LTD they both contribute towards this allowance.
For example you gained 3000 dividends from stock market in 2017
your allowance is 2000 for your LTD left..


... independently from any PAYE or other tulip

[RonBW]

Or is the £5k dividend allowance always independent of everything else, and should always been taken?

I don’t really need the money – just want to make sure I’m doing the most tax-efficient thing.

You can earn £5k in dividends at zero percent tax. If you haven't earned any dividends anywhere else, you may as well take £5k out of your company at 0% now anyway.

[Louisa@AardvarkAccounting]

When you work out an individuals income tax liability, there is an order in which items are taxed:

1 - savings income
2 - non savings (employment income in this case)
3 - dividend income

So, your employment income will be taxed first at 20/40%. Then your dividends will be taxed, first £5,000 at 0%.

If you have additional dividends in excess of the £5,000, these will be taxed at the rate in which your income falls: BR 7.5%, HR 32.5%, AR 38.1%.

[Maslins]

I think the other commenters may have missed the point of your question...or perhaps I have.

The £5k dividend allowance is a tax free allowance, but it DOES also use up a chunk of your basic rate band. If you only take £5k (or less) in dividends then this is irrelevant. However where it can be relevant is if for example your salary from elsewhere took you to (say) £10k short of the higher rate band. You can only take £10k dividends before hitting higher rates, £5k of which would be tax free (covered by allowance) and £5k of which would suffer the basic rate, 7.5%.

[booms]

Thanks everyone - that's really helpful. It's a fairly subtle point I see.

In Maslins example – the first £5k ‘uses up’ £5k of the basic rate band, and so the rest of the dividend will be taxed at 20% or 40% depending on the total comp including the £5k div allowance up to that point.

But as dividends are always taxed after employment income – the £5k dividend payment could never have an effect on employment taxation.

Thanks again all.

[LondonManc]

Thanks everyone - that's really helpful. It's a fairly subtle point I see.

In Maslins example – the first £5k ‘uses up’ £5k of the basic rate band, and so the rest of the dividend will be taxed at 20% or 40% depending on the total comp including the £5k div allowance up to that point.

But as dividends are always taxed after employment income – the £5k dividend payment could never have an effect on employment taxation.

Thanks again all.

The best way of thinking about it in a full contracting year is to take you 11k employment income tax free, the 5k dividend tax free and then up to the 43k threshold in further dividends (that'll you pay 7.5% tax on). There's nothing wrong in taking more than that, you'll just be taxed at a far higher rate for doing so.

I suggested deferring to your accountant as they'll know where you're up to so far.

[SeanT]

I'm interested in this too, although I may not be able to do anything about it regardless (my business is getting paid on 13th April for the work I'm doing in March, and won't have a penny to its name until then). If (theoretically) I can get an advance on my invoice to bring it into this tax year, but I've already earned a shade over £50k gross as an employee up until 24th Feb, would I still be able to declare a dividend and receive my £5k entitlement without paying tax? Is there another way out of this hole?