Taxation Rates

[bruceg13]

Hello,
Can someone please tell me exactely how much in dividends I can take out per financial year until I hit the higher tax bracket?
I have heard I can take out £27k per year in dividends and after that am subject to 25% on any dividends after that.
This is of course in addition to a minimal directors salary and expenses claimed.

Thanks.

[Xerxes]

HMCR has this information...

http://www.hmrc.gov.uk/rates/index.htm

[bruceg13]

Thanks for that but it doesnt tell me the tax payable on dividends

[Bradley]

Dividends

£32400 is the limit of the basic rate band for 2005/06

£4895 is the personal allowance for 2005/06

Assuming your salary is £4895 then this uses up the personal allowance

You can then pay £29160 dividends before paying any higher-rate tax

The tax sums work out as follows:

Dividends - cash in hand - £29160
Add:Tax Credit - £3240
Taxable Income - £32400
Tax Rate is 10% - £3240
Which is covered by the tax credit

If dividends were say £36000 cash in hand then the sums would be as follows:

Dividends - cash in hand - £36000
Add:Tax Credit - £4000
Taxable Income - £40000
In higher rate tax bracket - £7600 (£40000 - £32400)
In basic rate tax bracket - £32400
Tax Rate is 10% on dividends in basic rate tax bracket - £3240
Tax Rate is 32.5% on dividends in higher rate tax bracket - £2470
Total Tax - £5710
Less: Tax Credit - £4000
Tax Payable - £1710
or 25% of cash in hand dividend that strays into higher rate tax bracket

[boredsenseless]

Thanks for that but it doesnt tell me the tax payable on dividends

Obviously an accountant is your best bet here.

But in brief - and to the best of my knowledge (I use an accountant to do my own)

The UK income tax threshold for 40% income tax is set at X.

Your salary is taxed first, at 0%, 10% and 22% up to 40%.

Once you have paid your salary if you have not yet earned X, you can take dividends to the value of (X-salary) and because of the tax credit on dividends you will owe no further income tax.

Any dividend income that takes your combined income over the 40% threshold will be taxed at the full dividend tax rate of 32.5% although with the tax crdedit this is actually 22.5%.

Bear in mind the following 3 things

1) You have to have first paid corporation tax on profits before you can declare dividends (or made allowances for this charge) this is 19%.

2) You can only declare dividends out of profit, if you are making a loss or the dividend would make you incur a real loss then you can't pay it

3) The 40% tax limit applies to all income streams i.e. salary, dividends, rental income, interest earned, other jobs.


AGAIN - Talk to an accountant

[bruceg13]

Thanks to Bradley and Bored Senseless - just what I was looking for.

Cheers