41.5% Dividend Tax

[JLeduc]

In a 1-man Ltd Co with low-salary high dividend scheme...

.. if 19% Corp Tax is paid on profits regardless of how profits are being used (dividends or not) and dividends for high rate tax payer incur 25% dividend tax (22.5% off gross dividend) then overall one would pay 41.5% tax on the dividends that exceed the high tax band threshold. This is worse than 40% income tax so the only benefit of a low salary-high dividend ioncome is really the
reduced tax for dividends below high tax band threshold and the saved NI premim due to the low salary.

Correct?

[Ivor1]

In a 1-man Ltd Co with low-salary high dividend scheme...

.. if 19% Corp Tax is paid on profits regardless of how profits are being used (dividends or not) and dividends for high rate tax payer incur 25% dividend tax (22.5% off gross dividend) then overall one would pay 41.5% tax on the dividends that exceed the high tax band threshold. This is worse than 40% income tax so the only benefit of a low salary-high dividend ioncome is really the
reduced tax for dividends below high tax band threshold and the saved NI premim due to the low salary.

Correct?

Yep but you also get a tax credit on the dividend

[Gibbon]

I think your also forgetting about employers NI contributions which are applied to the whole salary so you would be paying 40% income tax and 11% employers NI = 51 %

[ASB]

I think your also forgetting about employers NI contributions which are applied to the whole salary so you would be paying 40% income tax and 11% employers NI = 51 %

He seemed to be talking about dividends not salary. There is no NI on dividends.

[simondolan]

In a 1-man Ltd Co with low-salary high dividend scheme...

.. if 19% Corp Tax is paid on profits regardless of how profits are being used (dividends or not) and dividends for high rate tax payer incur 25% dividend tax (22.5% off gross dividend) then overall one would pay 41.5% tax on the dividends that exceed the high tax band threshold. This is worse than 40% income tax so the only benefit of a low salary-high dividend ioncome is really the
reduced tax for dividends below high tax band threshold and the saved NI premim due to the low salary.

Correct?

Not quite. Easiest to explain with an example.

Say you invoice £1000. Corporation Tax on that would be £190, leaving £810 to declare as a dividend. Assume all this falls into the HR bracket, so on the £810 you would pay an extra 25% equalling £202.50. So, in total you have paid £190 + £202.50 which is £392.50, or 39.25% tax on the gross income of £1000.

[tim123]

I think your also forgetting about employers NI contributions which are applied to the whole salary so you would be paying 40% income tax and 11% employers NI = 51 %

This calculation is not additive.

The maximum total taken by HMG is around 47%.

(Yes it's still too high)

tim

[JLeduc]

Not quite. Easiest to explain with an example.

Say you invoice £1000. Corporation Tax on that would be £190, leaving £810 to declare as a dividend. Assume all this falls into the HR bracket, so on the £810 you would pay an extra 25% equalling £202.50. So, in total you have paid £190 + £202.50 which is £392.50, or 39.25% tax on the gross income of £1000.

Good example :-)
Slight oversight that precentages are not cumulative in this case ;-) My maths teacher would not be happy if he knew;-)