Dividends

[bbdp]

Hi

Contractor newbie here and getting myself confused and worried the more i read so wondering if someone can provide a simple answer.

How much tax do i pay on dividends if i am paying myself little or no salary (i.e. less than £10k per annum)?

This is both from a personal contribution stand point but also from the limited company's stand point?

I was under the impression that the company pays corporation tax on the profit and that as long as I'm under the lower limit for tax on my actual salary, that there is no further tax implication if i pay myself a dividend. Is that correct?

[Clare@InTouch]

Dividends have no effect on CT. All you need to ensure from a company point of view is that you have enough profit, after CT, to pay the amount you declare. CT is due on profit before dividends, being sales less allowable expenses and wages.

From a personal point of view it depends on your overall income, it's not really a simple "one size fits all" answer.

Dividends are paid net of a 10% tax credit, which simply means that the value you receive is not what HMRC see - so if you pay £10,000 what HMRC see is that you've paid £11,111 and paid tax thereon of £1,111. The only time you need to think about the gross value is when you're thinking about tax bands. You can earn up to £41,450 this tax year before you go into higher rates of tax, assuming a normal tax code, but that would be the gross dividend value. To get the net, which is the amount you actually pay yourself, you need to divide by 10x9. So £41,450 becomes £37,305.

Dividends are taxed at 10% in the basic rate tax band, so the credit offsets the tax due and you have no further liability. If you go into higher rates then the tax due on dividends increases to 32.5% of the gross, less the 10% tax credit = 22.5%. This equates to 25% of the net (£10,000 x 25% = £2,500, as does £11,111 x 22.5%). What you therefore need to remember is that if you withdraw dividends in excess of the basic rate band then you need to set aside 25% of that excess to settle your personal tax liability thereon.

When you are considering tax bands you need to take account of all your income, including bank interest, salary, rental income and anything else. Deduct these from the higher rate band, take what's left and divide by 10x9 = your maximum dividend before higher rates.

If your salary is £12,000 and you have a normal tax code then that leaves £29,450 of your basic rate band left = £26,505 net dividends. If you take £27,505 then you have gone into higher rates by £1,000 and can expect a tax bill of £250. This extra tax will be payable in the January following the end of the tax year - so anything paid up to 05/04/2014 will be due by 31/01/2015.

[LisaContractorUmbrella]

welcome

Have you established your IR35 status?

[northernladuk]

welcome

Have you established your IR35 status?

You can smell a potential customer can't you!

[LisaContractorUmbrella]

You can smell a potential customer can't you!

A mile off

[kingcook]

Dividends have no effect on CT. All you need to ensure from a company point of view is <snip>

Reading between the lines, you're gonna need an accountant!!!

[bbdp]

Dividends have no effect on CT. All you need to ensure from a company point of view is that you have enough profit, after CT, to pay the amount you declare. CT is due on profit before dividends, being sales less allowable expenses and wages.

From a personal point of view it depends on your overall income, it's not really a simple "one size fits all" answer.

Dividends are paid net of a 10% tax credit, which simply means that the value you receive is not what HMRC see - so if you pay £10,000 what HMRC see is that you've paid £11,111 and paid tax thereon of £1,111. The only time you need to think about the gross value is when you're thinking about tax bands. You can earn up to £41,450 this tax year before you go into higher rates of tax, assuming a normal tax code, but that would be the gross dividend value. To get the net, which is the amount you actually pay yourself, you need to divide by 10x9. So £41,450 becomes £37,305.

Dividends are taxed at 10% in the basic rate tax band, so the credit offsets the tax due and you have no further liability. If you go into higher rates then the tax due on dividends increases to 32.5% of the gross, less the 10% tax credit = 22.5%. This equates to 25% of the net (£10,000 x 25% = £2,500, as does £11,111 x 22.5%). What you therefore need to remember is that if you withdraw dividends in excess of the basic rate band then you need to set aside 25% of that excess to settle your personal tax liability thereon.

When you are considering tax bands you need to take account of all your income, including bank interest, salary, rental income and anything else. Deduct these from the higher rate band, take what's left and divide by 10x9 = your maximum dividend before higher rates.

If your salary is £12,000 and you have a normal tax code then that leaves £29,450 of your basic rate band left = £26,505 net dividends. If you take £27,505 then you have gone into higher rates by £1,000 and can expect a tax bill of £250. This extra tax will be payable in the January following the end of the tax year - so anything paid up to 05/04/2014 will be due by 31/01/2015.

Thanks Clare, thats very helpful.

[dmc]

Reading between the lines, you're gonna need an accountant!!!

What he said. Please don't continue on without an accountant, for that is the route to bankruptcy and debt.