Ltd Company - tax on dividends

[keeba28]

Hi

I'm new to contracting and have been advised to set up a Ltd Company. I'm investigating the different options and one website gave me an illustration. It's left me really confused though. I understand the part about the Ltd company paying me a really small salary, then distributing most of my income as dividends. But I don't understand the illustration, they are saying that the company would pay me a salary of £10k and a dividend of £26,101. The tax/NI on the salary would be about £1,484 and the 'higher rate tax' on the dividend would only be £222.63. How is this possible, wouldn't the dividend be taxed at 10% or 32.5%?? I've no idea why the tax on the dividend would be so low. Is this a con and is there a risk that the Inland Revenue would come after me for more tax at a later date if I use this method?

Thanks

[ratewhore]

You need to take into account tax credits on dividends.

[Nixon Williams]

Dividends are taxed at a notional 10% so a £900 dividend has a £100 tax credit making a gross dividend of £1000

Provided you do not enter the Higher Rate bracket then there is no more personal tax to pay on the dividends.

If you do exceed the Higher Rate threshold then the value of the dividends that exceed this limit is subject to extra tax.

The extra tax is 32.5% of the gross, less the 10% tax credit so in effect it is 22.5% of the gross (or 25% of the net).

So if you exceeded the threshold by £1000 in gross dividends the extra tax you would pay would be 22.5% X £1000 = £225, OR 25% x £900 which will give you the same answer of £225

I hope this makes it clearer!

Alan

[keeba28]

thank you for the reply.

One other quick question, if I go down this dividend route do I need to wait until the end of the year (when the company's accounts are drawn up) before the dividend can be declared and paid to me? I know that a dividend can only be paid if there are profits, but could I declare a dividend every single month? ANd is there lots of paperwork associated with this?

Thanks!

[Billy Pilgrim]

I believe you can take it when you like as long as there is profit in the company.

I generally bang over my yr to date figures to my accountant every once in a while - who then works out the max / sensible amount I can declare as dividends.

Paperwork will be done at year end - not by me I hasten to add - so no idea how much there is on that front.

[rawly]

If you do exceed the Higher Rate threshold then the value of the dividends that exceed this limit is subject to extra tax.

Just to clairify this is when your combined gross income and dividend income exceed the higher rate threshold - not just your gross income.

[Nixon Williams]

Just to clairify this is when your combined gross income and dividend income exceed the higher rate threshold - not just your gross income.

Yes, this is your total income from all sources.

Alan

[Nixon Williams]

thank you for the reply.

One other quick question, if I go down this dividend route do I need to wait until the end of the year (when the company's accounts are drawn up) before the dividend can be declared and paid to me? I know that a dividend can only be paid if there are profits, but could I declare a dividend every single month? ANd is there lots of paperwork associated with this?

Thanks!

You can pay dividends as often as you wish provided that there are profits to support this.

We generally do monthly dividends for our clients and we also prepare all the paperwork, dividend vouchers and board minutes.

Alan

[BillHicksRIP]

What's the feeling about issuing a dividend shortly after the new tax year starts in April if you were in danger of paying the higher rate if you'd issued it shortly before? Bad form?

[Nixon Williams]

What's the feeling about issuing a dividend shortly after the new tax year starts in April if you were in danger of paying the higher rate if you'd issued it shortly before? Bad form?

No problems at all, nothing wrong with this you are aloowed to arrange your affairs to reduce your tax payments within the legal parameters.

Alan