Tax on dividends

[hausofwalker]

I have a question regarding tax on dividends and wondered if anyone can help, I’ve recently set up an ltd company and I’m trying to look ahead and organises any tax liabilities for dividends. Can someone confirm if I have understood the HMRC requirements correctly?

Any profit the ltd company has is subject to corporation tax X% depending on threshold, Records of this are kept for declaration to the HMRC for the company tax return. Profit less corporation tax is the amount of dividends which can be distributed to shareholders. 10% of which is the amount of tax credit.

Now, bear with me…………………………….

I need to retain a pot of money for the corporation tax which is due to HMRC (company tax return). Do shareholders need to retain a pot of money for the tax credits for when completing self-assessments or are they free to spend as long as its within £32,010+tax allowance?

[Scruff]

What does your Accountant have to say? You are asking Gladiators and Radiator Bleeders for accounting and tax advice?

[VectraMan]

Forget the tax credit. It's just a means to make things more complicated than they need to be. All it really means is the upper rate threshold is lower for dividends than other forms of income, but that's all worked out when you fill in your Self Assessment.

As for shareholders keeping a pot of money, well it's tax. If you spend all the money on sweets and can't pay your tax you'll be in trouble. But that's the shareholders' problem, not the company's.

[TheCyclingProgrammer]

Any dividends you take are taken net of the tax credit, but you need to gross them back up and include the notional tax credit when calculating your taxable dividend income for the purposes of the higher rate tax threshold.

[Martin at NixonWilliams]

The dividends are paid from the company net of a 10% tax credit. For example, if a £900 dividend is declared by the company, the shareholder receives a net dividend of £900 but the gross value of the dividend would be £1,000. It is the gross value of the dividend that you are assessed on for tax purposes.

For basic rate taxpayers, the dividends are effectively tax free. For higher rate taxpayers, the rate of tax is 32.5%, after the 10% tax credit the effecitve rate of tax is 22.5%. The 22.5% tax on the gross dividend works out to be the same as 25% of the net dividend, some find it easier to use this method.

The easiest way to manage this is to save 22.5% of any gross dividends (or 25% of the net dividend) received in excess of the higher rate threshold of £41,865. The funds should be saved in your personal account. Note that although this would cover your tax bill for the 2014/15 tax year, you might need to make additional savings to cover the payment on account of tax for the following year.

I hope this helps.

Martin

[Safe]

Tax on dividend

Hi,

My accountant has prepared my 2013-2014 personal tax return and I have noticed the amount of NET dividend is much higher than what I have declared from my Ltd company. After speaking with them in several phone calls they mentioned the following:
”We have added the amount of the tax which you need to pay as part of dividend on the top of the NET dividend and then we gross this up (dividing by 0.9) to calculated the gross dividend”. Can you please let me know if this is the right approach? Basically this means the tax which I suppose to pay as part of dividend is added on top of NET dividend and then they gross this up. They are saying the tax is reserved in the accountancy portal and the way it works is we consider that tax as a net dividend.

See below example calculation from accountant:

Net dividend declared (transferred to my personal account from business account) = £74K
Tax reserved in the portal from dividend is = £15K

Therefore total NET dividend is: £74K + £15K= £89K
Gross dividend: £89K/0.9= £98,889
Tax free salary declared in 2013-2014 tax year = £7,740

Total earning: £98,889+£7,740= £106,629
Tax code= 944L

Taxable income = £106,629-£9,440= £97,189

£97,189-£32,010 = £65,179

Tax due: £65,179 *22.5%= £14,665

The figure £14,665 is close to the tax reserved above for £15K.

I really appreciate for your advice.


Safe

[Scruff]

Have a look at your dividend certificates and they will tell you what your gross dividend is. This will also be reflected in your company's Minutes.

Ask for a copy of your Shareholder's Loan general ledger account.

The amount actually paid into your banking account is not necessarily the same as your net dividend, since dividends can be declared without having to be paid over.

[Forbes Young]

Hi,

My accountant has prepared my 2013-2014 personal tax return and I have noticed the amount of NET dividend is much higher than what I have declared from my Ltd company. After speaking with them in several phone calls they mentioned the following:
”We have added the amount of the tax which you need to pay as part of dividend on the top of the NET dividend and then we gross this up (dividing by 0.9) to calculated the gross dividend”. Can you please let me know if this is the right approach? Basically this means the tax which I suppose to pay as part of dividend is added on top of NET dividend and then they gross this up. They are saying the tax is reserved in the accountancy portal and the way it works is we consider that tax as a net dividend.

See below example calculation from accountant:

Net dividend declared (transferred to my personal account from business account) = £74K
Tax reserved in the portal from dividend is = £15K

Therefore total NET dividend is: £74K + £15K= £89K
Gross dividend: £89K/0.9= £98,889
Tax free salary declared in 2013-2014 tax year = £7,740

Total earning: £98,889+£7,740= £106,629
Tax code= 944L

Taxable income = £106,629-£9,440= £97,189

£97,189-£32,010 = £65,179

Tax due: £65,179 *22.5%= £14,665

The figure £14,665 is close to the tax reserved above for £15K.

I really appreciate for your advice.


Safe

Net dividends need to be grossed up by 10/9 for the tax calculation as all gross income needs to be the starting point.

So if your total income for the current tax year is £74k net dividends plus £7740 salary, then the gross divis will be £74000 x 10/9 = £82,222 plus £7740 salary = £89,962. Less Higher Rate Tax threshhold of £41,865 = £48,097 @ 22.5% I.T. = £10,822 tax to pay. This equates to £43,287 net divi over the HRT threshhold of @ 25%.

Last tax year the HR Tax Threshhold was £41,450. In which case tax payable is £89962 - £41450 = £48512 @ 22.5% = £10,915.

[Jessica@WhiteFieldTax]

@safe
It looks like either (a) personal tax on dividend (the higer rate element) has been paid from business account and therefore counts as an additional dividend or (b) this is being reserved for payment of personal tax prospectively.

If your net dividend is £74k and you are paying the personal tax from your own funds, then it's wrong.

If your net dividend is £74k and you are planning on paying the personal tax from business account then it's about right, although it's an odd way of explaining it.