Lots of reading has confused me.. help with basics

[RockyBalboa]

Hi

Have read lots on this forum and was initially quite clear but now have become a bit muddled with the division of income and tax brackets as follows.

'Savings income' aside for a moment, I understand that for 2008-2009:

1. Personal allowance is: 5,435
2. Basic rate income tax (20%) is: 0-36,000
3. Dividend rate for basic rate (above) is: 10% on a maximum of £34,600

Now, initially, where I am getting confused is the overall taxable income. I have read that it excludes dividends so does this mean that I can pay myself:

1. a salary of of up to 36,000 and get taxed 20% on the salary with a dividend of 34,600???

OR

2. my overall taxable income includes the salary and dividend?


OR

It works in a totally different way to the above???

Thanks for your help.

[VectraMan]

1. a salary of of up to 36,000 and get taxed 20% on the salary with a dividend of 34,600???

Salary and dividends are not independent. If you do the above, your dividends will be taxed at the higher rate because you've exceeded the threshold. It works salary, then dividends, then savings.

[RockyBalboa]

So is this correct:

Money from employment (Gross) = 5,435
LESS Personal allowance = 5,435-5,435=0
Total (non-savings) income = 0
Dividends (net) = 36,000-5,435 = 30,565
Statutory Total Income = 36,000

?

Thanks.

[VectraMan]

Probably. The complicated bit is that you need to allow for the 10% dividend tax credit.

[EvilWeevil]

So is this correct:

Money from employment (Gross) = 5,435
LESS Personal allowance = 5,435-5,435=0
Total (non-savings) income = 0
Dividends (net) = 36,000-5,435 = 30,565
Statutory Total Income = 36,000

?

Thanks.

No.

It is, at the moment, but in the autumn, the personal allowance will go up to £6,035. And the basic rate allowance will be reduced to £34,800.

This basic rate is exclusive of the allowance, so you can earn up to £40,835 before entering the higher rate band.

[Cheshire Cat]

My accountants have advised me that with a salary of, say, £10k, I would be able to pay dividends up to a further £30,800 ish (taking total income to ~£40.5k) before paying "higher rate" tax.
My salary would be PAYE, so I would receive ~ £9080 of the £10k salary net of income tax and NI.
The dividends of ~£30k would be declared with a "notional" tax credit of ~ £3,333, so the 10% personal tax that I would otherwise have to pay to HMRC has, for all intents and purposes, been netted out by this credit.
i.e. I get to keep ALL of the ~ £30k divs to spend on coke and hookers etc

If my company issues further dividends in this tax year, I will be liable for 22.5% personal tax on that, so another £10k div would earn me ~£7750 net.

Remember, ANY dividend you pay will be from company PROFITS, so AFTER your CT liability has been placed to one side, to pay HMRC later.

[RockyBalboa]

No.

It is, at the moment, but in the autumn, the personal allowance will go up to £6,035. And the basic rate allowance will be reduced to £34,800.

This basic rate is exclusive of the allowance, so you can earn up to £40,835 before entering the higher rate band.

It's being changed half-way through the fiscal year??

[KevinS]

It's being changed half-way through the fiscal year??

Yes, because of the fall out of dropping the 10% tax band, Darling had to backtrack to appease the great unwashed..

EDIT: It is being backdated to April 6th, though..

[RockyBalboa]

This basic rate is exclusive of the allowance, so you can earn up to £40,835 before entering the higher rate band.

Is that just for this year 2008-2009?

[Cheshire Cat]

Is that just for this year 2008-2009?

Yep, typically the rate thresholds shift from year to year.
And occasionally the treasury invent some kooky sh!t like this 10% game just to keep everyone interested.