Money i can pay myself

[diesel]

Hi need some clarification of money i can pay myself as director of my LTD co.

Accountant advised that I can pay myself:
Personal Allowance 6,475.00
20% Tax Bracket 37,400.00
Pension Contribution xxx
Earnings before 40% tax Total

However, i understand that dividends received need to be added 10% tax for income purposes....please can someone clarify as this is where i dont understand?
currently paymyself a monthly director wage, plus dividends monthly.
this year i will be well into higher tax bracket s- whats the best i can do with the excess money in the business? Is there any way this can be paid without paying 40% tax band?

[Clare@InTouch]

Hi

Income is taxed in this year:

0-37,400 - basic rate band
37,401 - 150,000 higher rate band
150,001 upwards - additional rate band

Your tax code will increase the basic rate band, usually up to £43,875 (with a tax code of 647L).

Dividends are taxed at 10% in the basic rate band, but they also have a 10% tax credit, so it's effectively zero. If you pay yourself £1,000 what you've actually received is £1,111 with tax paid of £111. This 'notional' tax credit needs to be considered when thinking about tax bands.

In the higher rate band dividends are taxed at 32.5%, less the 10% tax credit to give 22.5%. This equates to 25% of the net (A gross dividend of £1,111 taxed at 22.5% = £250 and a net dividend of £1,000 taxed at 25% = £250).

You won't therefore pay 40% tax if you're higher rate as that only applies to salary, but you might pay the 22.5% that applies to dividends.

You also need to consider any other income you have - bank interest, rental income, other salary or dividends, benefits in kind etc.

[diesel]

Hi

Income is taxed in this year:

0-37,400 - basic rate band
37,401 - 150,000 higher rate band
150,001 upwards - additional rate band

Your tax code will increase the basic rate band, usually up to £43,875 (with a tax code of 647L).

Dividends are taxed at 10% in the basic rate band, but they also have a 10% tax credit, so it's effectively zero. If you pay yourself £1,000 what you've actually received is £1,111 with tax paid of £111. This 'notional' tax credit needs to be considered when thinking about tax bands.

In the higher rate band dividends are taxed at 32.5%, less the 10% tax credit to give 22.5%. This equates to 25% of the net (A gross dividend of £1,111 taxed at 22.5% = £250 and a net dividend of £1,000 taxed at 25% = £250).

You won't therefore pay 40% tax if you're higher rate as that only applies to salary, but you might pay the 22.5% that applies to dividends.

You also need to consider any other income you have - bank interest, rental income, other salary or dividends, benefits in kind etc.

Thanks for the quick reply, makes its a bit more clearer. However, from what i understand you are saying is that dividends paid over the higher tax band are not subject to the 40% tax level, and only to 25% from net amount?

So i can pay myself
Personal Allowance 6,475.00
20% Tax Bracket 37,400.00
Pension Contribution 4,048.67
Earnings before 40% tax 47,923.67

minus
salary of 5,720 for the year.
Does this mean i can stil pay myself as dividends an amount of £42,216 including the 10% notional tax for the year? (but still need to account for bank interest etc.)
dividends above this amount are only subject to 25% tax in my self assessment?

thanks again

[Clare@InTouch]

Thanks for the quick reply, makes its a bit more clearer. However, from what i understand you are saying is that dividends paid over the higher tax band are not subject to the 40% tax level, and only to 25% from net amount?

So i can pay myself
Personal Allowance 6,475.00
20% Tax Bracket 37,400.00
Pension Contribution 4,048.67
Earnings before 40% tax 47,923.67

minus
salary of 5,720 for the year.
Does this mean i can stil pay myself as dividends an amount of £42,216 including the 10% notional tax for the year? (but still need to account for bank interest etc.)
dividends above this amount are only subject to 25% tax in my self assessment?

thanks again

It would be £47,923.67 less £5,720 = £42,203.

The dividends then need to be netted down - £42,203 divided by 10 x 9 = £37,982. The £37,982 is the amount you can actually take, and it will show as £42,203 on your tax return (with tax paid of the 10%).

If you take £38,982 you can expect a tax bill of £250.

[Alan @ BroomeAffinity]

But bear in mind the divis are paid out of retained profits which will already have been taxed at 21% which has a bearing on things.

[ratewhore]

This is sometimes useful:

HTH.

[xchaotic]

And I had though that I had it figured out!
Now I am a bit confused too.
Given the fact that in the past tax year I have been working as a salaried employee, I can't really take advantage of the 6,475.00 tax-free amount (my salary from non-Ltd has already used it up).
In total I have earned ca 18k on a salary.
I suppose the I can only pay myself ca 20k of dividends before I hit the higher tax bracket, right?

[rd409]

And I had though that I had it figured out!
Now I am a bit confused too.
Given the fact that in the past tax year I have been working as a salaried employee, I can't really take advantage of the 6,475.00 tax-free amount (my salary from non-Ltd has already used it up).
In total I have earned ca 18k on a salary.
I suppose the I can only pay myself ca 20k of dividends before I hit the higher tax bracket, right?

If you dont pay any more salary to yourself from ltd, then you might be in for a tax/ni refund as well.

[diesel]

It would be £47,923.67 less £5,720 = £42,203.

The dividends then need to be netted down - £42,203 divided by 10 x 9 = £37,982. The £37,982 is the amount you can actually take, and it will show as £42,203 on your tax return (with tax paid of the 10%).

If you take £38,982 you can expect a tax bill of £250.

thanks for the information.
But from the dividend calulator posted by ratehwhore it states this:
Dividends are taxed at the higher rate of 32.5% for income up to £150,000 and at the additional rate of 42.5% thereafter. The first 10% is already paid via a tax credit.

i notice these rates are 10% higher, is this due to the notional 10% tax?

Just1morethen - sorry for sounding but how does the 21% corp tax affect divis? As my accountants works out corp tax due each month based on my monthly fee income, so this has to be paid regardless.

[Clare@InTouch]

thanks for the information.
But from the dividend calulator posted by ratehwhore it states this:
Dividends are taxed at the higher rate of 32.5% for income up to £150,000 and at the additional rate of 42.5% thereafter. The first 10% is already paid via a tax credit.

i notice these rates are 10% higher, is this due to the notional 10% tax?

Just1morethen - sorry for sounding but how does the 21% corp tax affect divis? As my accountants works out corp tax due each month based on my monthly fee income, so this has to be paid regardless.

Yes - as per my original post the higher rate is 32.5%, but with the 10% tax credit it takes it to 22.5% of the gross (which equates to 25% of the net).

CT will be paid on profit regardless of whether you withdraw the dividends or not, but you shouldn't forget that you will have that to pay in addition to any personal tax. Sometimes people think the two are the same thing, and have something of a shock when they find out they aren't!