Salary/Dividends Tax threshold

[MrRobin]

If you receive only dividends (under higher rate threshold) and no salary, what happens then?

e.g. If you recieve only 10K dividends one year. Do you get a refund of the £1K tax credit?

From the Direct Gov Website:

Can you claim the tax credit if you don't normally pay tax?
No. You can't claim the 10 per cent tax credit, even if your taxable income is less than your personal allowances and you don't pay tax. This is because Income Tax hasn't been deducted from the dividend paid to you - you have simply been given a 10 per cent 'credit' against any Income Tax due.

[r0bly0ns]

Ok does that mean that my earlier statement "If that was the case then am I not left with £19325(39825-10500+10000) that could be declared as dividends." is correct??

No.

It does take a bit of getting your head round, what helped me was to think of it like this.


1. All dividend income below the higher rate threshold is taxed at 10%.
2. The 10% tax is credited back to you using a notianal credit (the voucher from your accountant), so you don't actually have to pay it.
3. When working out your tax bracketing, the 10% tax is included in your gross.



So, if we simplify the figures and assume 39,000 is the higher rate threshold and your salary is 10,000.

39,000 - 10,000 = 29,000 that you can pay in dividends without paying higher rate tax.

Now for every 900 you recieve in dividends, this 29,000 amount is reduced by 1,000 (gross dividend = amount received + tax credit).


In effect, all the tax credit does is reduce the amount you can earn before going into the higher rate.

[Lewis]

Thanks guys. Appreciate the help I'd like to ask one other question, a bit more real life ... What if the wife earns £3000 from Ltd company and has £2000 loses from self employment. What level of dividend should be declared to maximise take home without going into higher rate tax?

I am thinking it works as follows. Income = £3K - £2K = £1K. Gross dividend can then be higher rate threshold minus £1K to avoid higher rate tax (i.e. £38K). But the downside (compared to a 5K salary) is that 10% dividend tax credit has been 'lost' on £4K of her tax free amount.

Would it therefore be better to instead carry forward the self employment losses to the following year? Am trying to get my head around it.

[r0bly0ns]

Now that's one I'd definately throw to an accountant!


Seriously, though, I haven't got a clue!

[ASB]

Thanks guys. Appreciate the help I'd like to ask one other question, a bit more real life ... What if the wife earns £3000 from Ltd company and has £2000 loses from self employment. What level of dividend should be declared to maximise take home without going into higher rate tax?

I am thinking it works as follows. Income = £3K - £2K = £1K. Gross dividend can then be higher rate threshold minus £1K to avoid higher rate tax (i.e. £38K). But the downside (compared to a 5K salary) is that 10% dividend tax credit has been 'lost' on £4K of her tax free amount.

Would it therefore be better to instead carry forward the self employment losses to the following year? Am trying to get my head around it.

You are thinking on the right lines. I don't think you have the ability to carry forward/back self employed losses where there is offsettable income. This might influence your decisions.

In any event, you should ensure you have at least personal allowances worth of income overall. But, in your case it might not be as straight forward since upping salary to ensure you are in this position would incur NI and this may more than offset the "lost" tax credit.

[aj1977]

No.

It does take a bit of getting your head round, what helped me was to think of it like this.


1. All dividend income below the higher rate threshold is taxed at 10%.
2. The 10% tax is credited back to you using a notianal credit (the voucher from your accountant), so you don't actually have to pay it.
3. When working out your tax bracketing, the 10% tax is included in your gross.



So, if we simplify the figures and assume 39,000 is the higher rate threshold and your salary is 10,000.

39,000 - 10,000 = 29,000 that you can pay in dividends without paying higher rate tax.

Now for every 900 you recieve in dividends, this 29,000 amount is reduced by 1,000 (gross dividend = amount received + tax credit).


In effect, all the tax credit does is reduce the amount you can earn before going into the higher rate.

Got ya ...Cheers for that....
Many thanks for all the folks who explained this confusing stuff.
Armed with this information, I nailed down my accountancy firm(or rather one of the minions) and they have acknowledged their mistake.

Its quite surprising how a reputed accouting firm who frequent this forum have cocked up stuff thrice in a row in my case.

Time to change accountant i guess

[Lewis]

Can I ask you guys if this sounds sensible then. The actual situation is:

Income = £1K (£3K salary - £2K self employment losses).
Gross Dividend = £38K

But, in an ideal world to fully utilitise the tax free £5 band. It would be: Salary = £7K, so

Income = £5K (£7K salary - £2K self employment losses).
Gross Dividend = £34K

However then there is £4K left in the company which realistically is going to have to come out at the higher rate tax level anyway (especially with Income Splitting stuff next year). Which means paying £1300 tax on it.

So in the actual situation although she has lost 10% dividend credit on £4K (£400) overall it is still is a tax saving of £900 compared to taking the dividend as higher rate.

Does that sound right? I could ask my accountants but I'm not sure how they'd feel about dealing with my wife's finances :-)

Once again all help greatly appreciated.

[MrRobin]

Its quite surprising how a reputed accouting firm who frequent this forum have noddyed up stuff thrice in a row in my case.

That is quite worrying. I do keep parallel accounts in spreadsheets etc myself and when I get instructions from my accountant I check it against my own records. When there has been major differences, it's been my own mistakes so it has all helped me understand how it works (and help me gain confidence in them too!)

[aj1977]

That is quite worrying. I do keep parallel accounts in spreadsheets etc myself and when I get instructions from my accountant I check it against my own records. When there has been major differences, it's been my own mistakes so it has all helped me understand how it works (and help me gain confidence in them too!)

Hmm..in my Case all the 3 cases I have identified their mistakes and reported it to them.I have'nt checked their advises against PAYE,CT etc...iam starting to worry now

[ASB]

Can I ask you guys if this sounds sensible then. The actual situation is:

Income = £1K (£3K salary - £2K self employment losses).
Gross Dividend = £38K

But, in an ideal world to fully utilitise the tax free £5 band. It would be: Salary = £7K, so

Income = £5K (£7K salary - £2K self employment losses).
Gross Dividend = £34K

However then there is £4K left in the company which realistically is going to have to come out at the higher rate tax level anyway (especially with Income Splitting stuff next year). Which means paying £1300 tax on it.

So in the actual situation although she has lost 10% dividend credit on £4K (£400) overall it is still is a tax saving of £900 compared to taking the dividend as higher rate.

Does that sound right? I could ask my accountants but I'm not sure how they'd feel about dealing with my wife's finances :-)

Once again all help greatly appreciated.

Don't forget that in the second example the company has less profit because it's expenses have gone up, also NI would be payable. [i.e. you don't have the 4k left.You have spent the entire 39k - though if the 4k was somehow left 75% of it would be a damn site better than nothing]

I cannot envisage any circumstance where you would not be slightly better off overall (looking at amount received and what is retained if any) by ensuring you pay her a salary of 5225.

You retain 100% of this amount. The company saves CT at 20% of this amount.

You lose effectively 10% tax credit of the amount of her S/E losses.

If you want to work it out with you actual numbers do an online tax return (not submitting it ouf course) with both sets of numbers. Just remember that increasing the salary increases expenses and thus reduces CT.