Confusion over tax on dividends according to accountant Vs HMRC etc - advice please..

**SueEllen** · 8 April 2010, 19:06

Email the accountant and ask him/her for a breakdown of the figures with the tax bands.

Your accountant will have probably included any extra income i.e. savings, rental income, dividends from other companies in the first (lower),tax band meaning you can only pay yourself less in dividends.

I think there is a spreadsheet somewhere where that does the calculation for you.

**Robot** · 8 April 2010, 19:14

Originally posted by eliquant View Post

Via my limited company my accountant has advised me that for 2010-11 tax year I pay myself £12,000 salary and stated that the first £28,000 in dividends would not be taxed any further and that the next £96,000 (I'm assuming he meant dividends - not sure) would then be taxed at 25%.

Looking at the HMRC website (http://www.hmrc.gov.uk/taxon/uk.htm) I don't know how he came up with the figures I mentioned above - do they look correct to you ?? (please someone explain); I see on HMRC website that the dividend tax rate is 10% at what seems to be the £37,400 (gross level ??) - I thought that would be give us a net £37,400 * 0.9 = £33,660 net dividend payable to myself at the 10% (non-taxable level as these are 'tax credits' - right ?) level instead of the £28,000 mentioned above by my accountant.

Is the £28,000 something to do with the fact that I am paying myself a wage and that somehow reduces the dividend I can pay myself at the lower dividend tax band ??

Also where did he get the 25% from ? according to the HMRC website (http://www.hmrc.gov.uk/taxon/uk.htm the dividend tax rates are 10%, 32.5% or 42.5% depending on the volume of divided payment to oneself.

Totally confused anyone make sense of this ? I would think that the 25% the accountant mentioned is to do with the salary income not the dividend income or maybe its a dividend 'effective tax rate' GOD KNOWS !!

Your help and advice would be much appreciated.

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Net dividend £400 + tax credit £44.44 = £444.44

Gross Dividend £444.44 @ 32.5% = £144.44

Tax payable £144.44 less tax credit £44.44 = £100.

Or 25% of the net dividend £400 @ 25% = £100.

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£43,875 - 12,000 = £31,875 / 10 * 9 = £28,687.50

assumption you have no other income so you can take £28,687.50 tax free.

Robot

**eliquant** · 8 April 2010, 20:06

Originally posted by Robot View Post

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Net dividend £400 + tax credit £44.44 = £444.44

Gross Dividend £444.44 @ 32.5% = £144.44

Tax payable £144.44 less tax credit £44.44 = £100.

Or 25% of the net dividend £400 @ 25% = £100.

---------------------------

£43,875 - 12,000 = £31,875 / 10 * 9 = £28,687.50

assumption you have no other income so you can take £28,687.50 tax free.

Robot

Thanks I'm starting to see what the accountant was getting at. You say tax free above - though its not really tax free as it was profit in the first place and came under Corporation Tax which is 21% to start with - right ???

**rmmc** · 8 April 2010, 20:06

Originally posted by eliquant View Post

Via my limited company my accountant has advised me that for 2010-11 tax year I pay myself £12,000 salary and stated that the first £28,000 in dividends would not be taxed any further and that the next £96,000 (I'm assuming he meant dividends - not sure) would then be taxed at 25%.

As commented earlier you pay 25% tax on net dividend (cash payment) or 32.5% on gross dividend (net dividend + 10% notional tax credit).

However your figures (rather your accountant) do not add up correctly. Looks like your accountant forgot about the loss of personal allowance over the income of £100K!

So £12000 + 28000 = less 37400 = 2600. As this amount higher than basic tax rate band so you would pay 25% tax on £2,600 + 96,000.

**Robot** · 8 April 2010, 20:17

Originally posted by eliquant View Post

Thanks I'm starting to see what the accountant was getting at. You say tax free above - though its not really tax free as it was profit in the first place and came under Corporation Tax which is 21% to start with - right ???

Companies pay you dividends out of profits on which they have already paid - or are due to pay - tax. The tax credit takes account of this and is available to the shareholder to offset against any Income Tax that may be due on their dividend income. When adding up your overall taxable income you need to include the sum of the dividend(s) received and the tax credit(s). This income is called your dividend income.

**ASB** · 9 April 2010, 13:40

Originally posted by Robot View Post

----------------------------
Net dividend £400 + tax credit £44.44 = £444.44

Gross Dividend £444.44 @ 32.5% = £144.44

Tax payable £144.44 less tax credit £44.44 = £100.

Or 25% of the net dividend £400 @ 25% = £100.

---------------------------

£43,875 - 12,000 = £31,875 / 10 * 9 = £28,687.50

assumption you have no other income so you can take £28,687.50 tax free.

Robot

That assumes of course that the OPs tax code is the standard 6,475. Figures will be different if it isn't of course.

**eliquant** · 9 April 2010, 14:16

quick question .. where did you get the £43,875 from ? is it a made up divided income or some upper limit on a tax band ? I cannot see how its the latter.

**rmmc** · 9 April 2010, 14:29

Originally posted by ASB View Post

That assumes of course that the OPs tax code is the standard 6,475. Figures will be different if it isn't of course.

Generally you are entitled to personal allowance of £6,475.

If you have different tax code means, you are paying tax for something else(tax owed from previous year/s, or tax code adjusted for benefit in kind, or any other income). As HMRC want to collect tax as soon as possible.

Originally posted by eliquant View Post

quick question .. where did you get the £43,875 from ? is it a made up divided income or some upper limit on a tax band ? I cannot see how its the latter.

£6,475 + £37,400 = £43,875

**Nixon Williams** · 9 April 2010, 14:52

If you did not want to pay any higher rate taxes then for 2010/11 (also the same for 2009/10) provided your gross income does not exceed £43,875 then no extra tax would be paid.

To work out what dividends you could take deduct the gross salary from £43,875 and the dividend would be 90% of the remaining value, eg

Gross salary £12,000

Available for gross dividend (43,875 - 12,000) = 31,875

Net dividend = 31,875 X 90% = £28,687.50

As a previous poster has stated, if your personal allowance is different to £6,475 then the above figures would differ.

Carrying on from the above you could declare additional net dividends of £50,512.50 (100,000 - 43,875 = 56,125 - X 90% = £50512.50) before losing any of the £6,475 tax allowance.

The above assumes that you have the profits to do this!

Just to re-cap:

1. From 2010/11 if your gross income exceeds £100,000 then you will gradually lose your personal allowance.

2. If your gross income also exceeds £150,000 then income above this is taxed at 50% -for dividends the tax rate is 42.50%, less the tax credit leaving an effective rate of 32.50%

I hope this helps, HMRC do not make the rules easy to follow!

Alan

Confusion over tax on dividends according to accountant Vs HMRC etc - advice please..