Dividend vs Higher Rate Tax - what does the panel think?

**Maslins** · 30 January 2014, 10:01

I'd suggest thinking longer term.

If you anticipate the company's profit and cash you'll want to take out of it are only likely to go up, then I'd take the larger amount now. Whilst some of it will suffer effective 25% tax, the other bit will be tax free. If next year you'll be taking out more hence both suffering 25%, you'll kick yourself for missing out on the tax free bit now.

If on the other hand things are looking less rosey longer term, so next year it may well be that neither of you hit higher rates, might be a shame to take a bit of extra cash now paying tax on it when you could potentially wait a couple of months and get it tax free.

**Martin at NixonWilliams** · 30 January 2014, 10:03

Originally posted by aoxomoxoa View Post

I'm interested in what forumites think/do....

MyCo shares are split 70/30 between me and Mrs A. If for this tax year I take dividends from MyCo such that my total income for the year is just below the threshold at which 40% income tax rate kicks in, then Mrs A's income will be about £3k into the 40% band. Alternatively if MyCo only pays dividends so that Mrs A remains below the 40% band I'm leaving money in MyCo that I could have received at the standard rate.

I would imagine this is a fairly common scenario, so I'm interested in how others decide on the trade-off, both in financial terms and re the HMRC radar.

(Incidentally Mrs A would have to do Self Assessment for the first time if she hits the 40% bracket, which she's not too chuffed about, but I'm ignoring that as a serious consideration!)

For the sake of argument let's assume that either option gives us enough income for day-to-day living.

Thoughts?...

It depends on a lot of things really, if you don't need the money for living costs etc it is probably best left in the account and taken when you close the company. If you are eligible for entrepreneurs relief then you will pay no more than 10% on the income when the company is closed. I wouldn't worry about HMRC, they can't challenge the amount of dividends you declare.

Note that Mrs A would need to do a tax return in any case as she receives investment income in excess of £10,000.

I hope this helps.

Martin

**TheCyclingProgrammer** · 30 January 2014, 13:19

I would take the option that doesn't push your wife into the higher rate tax band, if that gives you enough money to live on. You pay less tax and she doesn't have to fill in a SA - result!

The money you didn't take hasn't gone anywhere. It will sit in your company account, admittedly not doing very much, but its now part of your war chest. If you have a lean few months, you'll probably be glad its there.

People have different ways of managing their war chest - some like to draw as much tax free dividends out as possible and put it in savings or investments, but personally I think it's a good thing to always have at least a 6 month buffer in the company reserves that can be used to pay dividends up to the higher rate threshold if you need it.

Not only that, but if you ever decide to take on a full time job, you'll have the option of shutting down the company and taking a capital distribution which, if you're both eligible for entrepreneurs relief, will be taxed at 10%. On that note...if you're wife is a shareholder, you should probably ensure she is either an employee or company officer to ensure she qualifies for ER (she will have had to have been an employee/officer for at least 12 months prior to shutting down YourCo). If you don't pay her a salary, you may want to think about making her a director or company secretary.

I don't agree with Martin that she should have to fill in a SA due to earning more than £10k in dividends though. I know what the HMRC page says, but that's not the law. HMRC have not asked her to fill out a SA and she doesn't owe any tax therefore there really is no reason to do one.

In fact, if you read the page where HMRC mention the £10k in investment income, it's actually in the context of collecting tax through your tax code:

If you are an employee or a pensioner and already pay tax through a PAYE code, you can sometimes ask for tax that you owe on income, such as savings and property, to be collected through your code number. You'll need to complete a tax return instead if the income you receive is:
£10,000 or more from taxed savings and investments
£2,500 or more from untaxed savings and investments
£10,000 or more from property (before deducting allowable expenses)
£2,500 or more from property (after deducting allowable expenses)

From: http://www.hmrc.gov.uk/sa/need-tax-return.htm

They are basically saying, if you have investment income up to £10k and owe tax, they can collect it through your tax code. Otherwise you'll need to submit a SA and pay the tax that way. But if you don't owe any tax, I can't see why you'd need to submit one at all.

It then goes on to say:

If you don't pay tax through a PAYE code you’ll need to complete a tax return if all of the following apply:
you have income to declare, for example income from savings, trusts or abroad, rental income from land or property
your total income exceeds your total allowances and reliefs
you have tax to pay on this income

Slightly different context, but the above seems pretty clear to me that HMRC only expect a tax return from you if you have tax to pay. It's just written very badly.

**Fred Bloggs** · 30 January 2014, 14:08

It looks to me like TCP has nailed it for me. One thing I would advocate, is once you have built up a decent reserve in the MyCo bank account, don't overlook making decent contributions to your pension.

**S Hudson** · 4 February 2014, 15:37

Originally posted by Fred Bloggs View Post

It looks to me like TCP has nailed it for me. One thing I would advocate, is once you have built up a decent reserve in the MyCo bank account, don't overlook making decent contributions to your pension.

Or if you've maxed out your pensions - profit extraction using EIS or VCTs.........

**northernladuk** · 4 February 2014, 21:04

Originally posted by aoxomoxoa View Post

I
(Incidentally Mrs A would have to do Self Assessment for the first time if she hits the 40% bracket, which she's not too chuffed about, but I'm ignoring that as a serious consideration!)

Incorrect. She has to do it if she receives investment income of over 10k. I wouldn't ignore it if I were you.

**TheCyclingProgrammer** · 4 February 2014, 22:51

Originally posted by northernladuk View Post

Incorrect. She has to do it if she receives investment income of over 10k. I wouldn't ignore it if I were you.

[citation needed]

There's no legal basis for this.

The only reference to this £10k threshold on the HMRC website relates to the maximum amount of investment income that HMRC can collect the tax for through your tax code.

If you have no tax to pay and no notification to file a return, you are not legally required to file a SA.

The HMRC self assessment manual pretty much confirms this:

Exceptions to the requirement to notify chargeability
Section 7(3) to (7)

There are exceptions to this requirement. These are where the taxpayer has no chargeable gains (or such gains as there are do not exceed the annual exempt amount), and either:

has no net liability to income tax for the year, or
has had sufficient tax deducted at source to meet the net income tax liability for the year.

http://www.hmrc.gov.uk/manuals/salfmanual/SALF210.htm

Dividend tax credits count as tax deducted at source by the way, so unless you're a higher rate tax payer or have capital gains over he CGT threshold there, or have basic rate tax that hasn't been deducted at source, you're unlikely to need to notify HMRC.

To further reinforce this, the maximum penalty for failure to notify is the tax owed. No tax, no penalty.

For the avoidance of doubt, if HMRC request a SAR, you have to do one regardless of the tax owed.

They also say you must file one if you're a company director but I'm not sure what the legal basis for that is either.

**DirtyDog** · 4 February 2014, 22:58

Originally posted by TheCyclingProgrammer View Post

[citation needed]

HM Revenue & Customs: Do you need to complete a tax return?

Originally posted by HMRC

You have income from savings, investment or property
If you are an employee or a pensioner and already pay tax through a PAYE code, you can sometimes ask for tax that you owe on income, such as savings and property, to be collected through your code number. You'll need to complete a tax return instead if the income you receive is:

£10,000 or more from taxed savings and investments

**TheCyclingProgrammer** · 4 February 2014, 23:05

Originally posted by DirtyDog View Post

HM Revenue & Customs: Do you need to complete a tax return?

Read it again. It's taking about collecting tax through your tax code. If you earn more than the limits it outline and you have tax to pay, they cannot collect the tax through your tax code and you will have to submit a SA if you owe any tax.

You have income from savings, investment or property
If you are an employee or a pensioner and already pay tax through a PAYE code, you can sometimes ask for tax that you owe on income, such as savings and property, to be collected through your code number. You'll need to complete a tax return instead if the income you receive is:

Emphasis mine. If there is no tax owed, then that section is irrelevant.

It could be written a lot better. The link to the HMRC manual I posted above, which is based on the underlying legislation, is a lot clearer.

Having said that, the very next part on that link says this:

If you don't pay tax through a PAYE code you’ll need to complete a tax return if all of the following apply:
you have income to declare, for example income from savings, trusts or abroad, rental income from land or property
your total income exceeds your total allowances and reliefs
you have tax to pay on this income

His just reinforces the need to file only when you owe tax.

Dividend vs Higher Rate Tax - what does the panel think?