Calculation of Tax with Dividends

[Cirrus]

As a plain vanilla contractor, I take minimum salary (lets call it £11000 for the sake of argument) and then give myself dividends up to the higher rate threshold. Were it not for the new Dividend Tax rules I could therefore take another £32,000 as dividend.

The new rules seem to be saying you have to pay 7.5% on your dividends above £5000 but looking at the Revenue site it looks to me as though those £5000 dividends are not factored out of the equation. It looks like they remain in the calculation of total income. So in simple terms it looks like I am paying 7.5% but can't take £32k + £5k without the £5k attracting 32.5% tax.

In other words all the dividend counts towards your tax bands but for £32k you will only have to pay 5.9% dividend tax.

Is that how it works?

[Kenny@MyAccountantFriend]

Yes in effect you pay 7.5% on 27k of dividends with the other 5k being tax free.

[Louisa@InTouch]

Yes, the £5,000 dividends rate at 0% is included within the basic rate band.

So, with a salary of £11,000 and dividends of £32,000, to take your total income to £43,000. You will pay £2,025 income tax on your dividends.

Then any dividends thereafter will be taxed at 32.5%.

[northernladuk]

Yes, the £5,000 dividends rate at 0% is included within the basic rate band.

So, with a salary of £11,000 and dividends of £32,000, to take your total income to £43,000. You will pay £2,025 income tax on your dividends.

Then any dividends thereafter will be taxed at 32.5%.

Only an accountant would put a happy smiley after informing us about what tax we need to pay

[Cirrus]

It's shocking to have to pay 32.5% on top of the 20% CT already subtracted

[Andrew@Wisteria]

It's shocking to have to pay 32.5% on top of the 20% CT already subtracted

46% overall though, rather than 52.5% (still not great though!)

[TheCyclingProgrammer]

46% overall though, rather than 52.5% (still not great though!)

And still presumably less than you'd pay if you could pay yourself a bonus via PAYE once you factor in employers and employees NIC (not that you could do this with dividends being taxed as the top slice).

[Louisa@InTouch]

Only an accountant would put a happy smiley after informing us about what tax we need to pay

And yes a face, as there's bigger things to be unhappy about. Large APN's, IR35 and bad weather!

[PerfectStorm]

It's shocking to have to pay 32.5% on top of the 20% CT already subtracted

Then 20% on the VATable goods you go on to buy, or stamp duty on your house...

[kaiser78]

Yes, the £5,000 dividends rate at 0% is included within the basic rate band.

So, with a salary of £11,000 and dividends of £32,000, to take your total income to £43,000. You will pay £2,025 income tax on your dividends.

Then any dividends thereafter will be taxed at 32.5%.

My accountants have suggested taking out a larger dividend for yr 2015/16 than the £32k, and a lower one in yr 2016/17 as a way of reducing the overall tax liability over those 2 financial years, as a result of the new dividend tax.