Higher rate personal tax on dividends

[chuddy]

Gonzo,

Thanks for clarification. I just spoke to somebody else and they told me that the tax credit of 10% actually eats into your lower threshold allowance. Is this true as well?

Is the following correct:

i.e. since lower threshold is £33 300, if my salary took me up to £33 100 then a dividend of £200 would actually take me over £33 300 since the £200 would in fact be seen as being worth (£200 + (£200/9)) £222.22. With this case I would have to pay tax at the higher threshold for the £22.22. Very odd...

Also, just to confirm, from my company's point of view, they have just given their shareholder £200 net of corporation tax.

Is this a mechanism to make companies give out more dividends instead of putting the money back into the business?? Does not seem to make much sense to me unless there is some specific tax loophole it is trying to close off.

[Gonzo]

You pay tax on your gross income.

So a dividend of £200 in your pocket is worth £222.22 when working out your income for tax purposes.

I haven't checked the rates recently so do not take my word for it but, from memory, your 10% tax credit covers the basic rate of tax (22%), so if you get any income over the higher rate threshold you owe another 18% of the gross amount over the threshold to the tax man.

[TheFaQQer]

Personally I seem to be doing a good job of avoiding paying any corp tax. First months figures are in. Billed £5k ... left £1k

Fecking startup costs and accounts taking my money well I'll show them....grrrrr

With you on that one - just completed year one as My Ltd, and Mrs Faqqer keeps telling me that she thought there would be more money in the account! I keep having to remind her that the company has traded for a year, and I only contracted through it for 7 months...

[boredsenseless]

Gonzo,

Thanks for clarification. I just spoke to somebody else and they told me that the tax credit of 10% actually eats into your lower threshold allowance. Is this true as well?

Is the following correct:

i.e. since lower threshold is £33 300, if my salary took me up to £33 100 then a dividend of £200 would actually take me over £33 300 since the £200 would in fact be seen as being worth (£200 + (£200/9)) £222.22. With this case I would have to pay tax at the higher threshold for the £22.22. Very odd...

Also, just to confirm, from my company's point of view, they have just given their shareholder £200 net of corporation tax.

Is this a mechanism to make companies give out more dividends instead of putting the money back into the business?? Does not seem to make much sense to me unless there is some specific tax loophole it is trying to close off.

Your company cannot give you £200 net of corporation tax, you can't pay corporation tax you are an individual.

The company may or may not have paid corporation tax on the profits before giving you the dividend, it's none of your business - however if you are also an office holder than you are bound to ensure that the correct CT is paid.

The Tax Credit is purley a slight-of-hand invented by the Tax Office to stop claims of double-taxation.

[XLMonkey]

The tax credit etc is solely so that the state can't take tax twice from the same income.

A company pays it's dividend to shareholders from profits after tax. It is taxed at 19%. So if it made 100 profit, then it has 81 pounds left to distribute

Shareholder receives 81 pounds in income. Fills in tax return. Thing is, if the shareholder then pays income tax, then the state will have collected twice (once through corporation tax, then through income tax). So, HMRC play a little maths game to ensure that he only pays tax once, until he gets to the higher rate tax threshold.

HMRC gives shareholder a notional tax credit of 1/9 of the dividend. So, 9 pounds (81/9). Shareholder declares on tax return both the dividend, and the credit, as income. So, he says

I got paid 90 pounds in income from dividends.

I owe you 10% of that (the effective rate for dividend income),
but I have already "paid" 9 of tax on it (that's the tax credit).

so keep your hands off my wad.

However, if the shareholder goes above the basic rate of income tax, then he owes 32.5% of the total (32.5% of 90), so he pays 29.25, split into

9 of tax credit
and
20.25 of additional income tax.

The marginal rate of tax on dividend income works out at
19% on income below the higher rate tax threshold, and
39.25% on income above it.

[chuddy]

XL Monkey, thanks for the explanation. Makes a little more sense now

I think the key thing that confused me was the 10% credit. I originally thought that it had something to do with the Corporation Tax. Did not know that it was just a notional rate that was just chosen.