Trying to understand 10% Dividend Tax Credit ..

[maverick18]

Hi,

I've been reading the threads and trying to make sense of the salary and dividend split.

From what I gather, it is ideal to pay yourself a salary of ca.£6k per year and dividends of ca.£37k per year to avoid any further tax.

What does this mean for my personal tax returns? I guess I would not have to pay tax on the salary but what about the dividends?

The other thing I read is about 10% tax credit on dividends. Cant seem to make much sense out of it. Could anyone please throw some light on it?

Thanks!

[zedAccounts]

The £37k you quote includes the tax credit. The net dividend you receive is £33300. If your total income is under the 40% threshold there is no additional tax to pay; if over then you pay more tax.

ZED.

[malvolio]

Hi,

I've been reading the threads and trying to make sense of the salary and dividend split.

From what I gather, it is ideal to pay yourself a salary of ca.£6k per year and dividends of ca.£37k per year to avoid any further tax.

What does this mean for my personal tax returns? I guess I would not have to pay tax on the salary but what about the dividends?

The other thing I read is about 10% tax credit on dividends. Cant seem to make much sense out of it. Could anyone please throw some light on it?

Thanks!

These are basics, you really need to do some background reading; running a company is not a game for the uninformed.

Anyway, CBA to do the full detailed answer but put simply, dividends are taken from net profits on which you've already paid Corporation Tax. You get a notional 10% tax relief on the dividend so that the personal rate and the CT rate are aligned, the end result being you don't need to pay any more tax on divvies until you reach the higher rate band.

Divvies also do not attract NICs. Therefore you pay PAYE and NICs on your salary only. Both salary and dividend income will be declared on your SA return

I'll leave to to work out (a) why £6k a year salary and (b) why you haven't got an accountant.

[maverick18]

The £37k you quote includes the tax credit. The net dividend you receive is £33300. If your total income is under the 40% threshold there is no additional tax to pay; if over then you pay more tax.

ZED.

Thanks. I think I might understand with some numbers.

Assuming..

Gross Income = £80k
Less:Salaries paid = £6k
Less:Other Expenses = £14k

Net Income = £60k
Less: Tax @ 21%

Income after Tax = £47k

Now this £47k can be distributed as Dividends. So if I give myself dividends of £33.3k (or £37k ??) per year, I would not have to pay further tax on it since the Company has already paid CT of 21% on it.

Hence, my total earnings would be £43k (salary of £6k + dividends of £37k).

When I refer to the tax bands, it says 20% tax rate for upto £37.3k. But that is post the allowance of £6k. So I need not pay tax on my salary since I am drawing only £6k pa.

Now, regarding dividend income, from what I gather, I do not have to pay any tax if the dividends paid to me are £33.3k. or is it £37k??

[maverick18]

These are basics, you really need to do some background reading; running a company is not a game for the uninformed.

Anyway, CBA to do the full detailed answer but put simply, dividends are taken from net profits on which you've already paid Corporation Tax. You get a notional 10% tax relief on the dividend so that the personal rate and the CT rate are aligned, the end result being you don't need to pay any more tax on divvies until you reach the higher rate band.

Divvies also do not attract NICs. Therefore you pay PAYE and NICs on your salary only. Both salary and dividend income will be declared on your SA return

I'll leave to to work out (a) why £6k a year salary and (b) why you haven't got an accountant.

Thanks for this.

I've only recently started contracting. Yes, I have been reading a lot and thought it would be prudent to get a grip on the basics before I approach an accountant. Its obvious I am not from an accountancy background and hence the basic questions.

[VectraMan]

This sort of thing can only have been designed to prop up the accountancy profession by making it too complicated for human beings to understand.

Basically, the government gives you some money. Very roughly, if you earn £33K, the government "gives" you an extra ~£4K, which is why the upper limit is effectively £33K and not £37K (if you really earned £37K the "gift" of £4K would take you over the top). But then they tax you at 10%, which is the tax for dividends, which is, funnily enough ~£4K.

This means that the overall amount of tax you pay is 0%, but has the effect of lowering the upper limit from ~£37K to ~£33K.

Does that sound like a reasonable explanation?

If you're thinking that's beyond insanity and only a certified lunatic (or Labour chancellor) could possibly have dreamt it up, you'd not be the first.

[maverick18]

Does that sound like a reasonable explanation?

Awesome!

probably took me longer to figure out the offsetting effect of 10% tax credit but its crystal clear now ..many thanks!

[Fred Bloggs]

This is one of those totally unnecessary bodges by Mr Brown that I really do hope the office of tax simplification sort out. It is a really stupid system at the moment and it is ripe for simplification.