Dividend Question

[Swashbuckler]

Newbie here.

I'm looking to pay myself a dividend, but want to keep some back for any tax charges. How much do you get taxed on dividends?

[Fleetwood]

(Sound of repeated dull thudding of Malvolio's head against nearest brick wall)

[malvolio]

You can't keep it back, it's your personal tax not your company's. Make very sure you keep the distinction between your money and your company money clear in your mind at all times - they are totally different legal entities.

Until your net pay and dividends crosses the upper tax band (roughly £37k pa), divis are effectively tax free - to be precise the tax has been paid by YouCo's Corporation Tax and you don't get taxed twice. Once you go over the upper limit, it's 40%.

The balance point varies according to how you pay yourself, but a good rule of thumb is to assume 25% of all divis are going to the taxman (now wait for the mathemeticians to come and cloud the issue...)

[Swashbuckler]

Thanks Molvolio,

Great Stuff

[oraclesmith]

Basically, the amount you have to retain in the company is to pay your corporation tax bill on the dividends plus any other profit your company has made. Dividends are taken from profit, whereas salary, NI, PAYE, some business expenses, accountancy fees etc and some capital items are taken from gross income.

When your limited company issues the dividend it will also issue a tax voucher for shareholders which will state the amount of tax credit (about 19%), which is roughly the amount you need to hold back in the company account. As Director you need to ensure the right minutes, tax vouchers etc get made out and filed.

If you know your profit figure there is an HMRC corporation tax calculator available on their website which will help you figure out your whole CT burden. There is an exempt amount and a margin relief scheme which will reduce the actual tax you pay. You're accountant should help you do this at end of year.

[oraclesmith]

And as Mal said, to you as an individual basic rate taxpayer the dividends are effectively tax free (the company pays the tax as CT and double taxation is avoided because you have a tax credit for the basic rate of tax). However, your dividend is still treated as taxable income for the purposes of working out your higher-rate tax burden. So if your total income for the year goes over the upper earnings limit, then you must pay top up tax (about 18% extra) for the amount over the upper earnings limit. You should also beware any settlement S660A possibilities if there are other shareholders involved (eg a close partner) because these may end up being taxed on you as well.

[malvolio]

Told you so.. .

[ASB]

Regarding the dividend that is not the position since ACT was abolished.

There is no CT on dividends, only profits. Dividends are paid net and attract a tax credit of 1/9th (i.e. 10% of the nominal gross dividend). This counts as full credit towards lower or standard rate income tax. It is not reclaimable for a nil rate taxpayer [hence it is sensible to ensure a salary of at least the tax free band is paid].

In the event that you are a higher rate taxpayer (Total income > 37295) then there will be additional income tax to pay. The gross divdends in the higher rate are subject to tax at 32.5%. However you receive the notional tax credit.

So assume you have total income of 57295 including 20,000 of dividends (or it could all be dividends of course just the point over 37295 is the issue).

20,000 + 1/9th = 22,222.22 x 32.5% = 7222.22 - 2222.22 = 5000.00 [25% of the appropriate net dividend]

[VectraMan]

20,000 + 1/9th = 22,222.22 x 32.5% = 7222.22 - 2222.22 = 5000.00 [25% of the appropriate net dividend]

Glad I have an accountant as it's taken me several reads of that to understand it.

So if the dividend is paid net, does that mean the company pays the tax just like with PAYE? I assumed the company wouldn't pay any tax on the dividend, and it was up to the director to pay any tax owed at the end of the year, or after self assessment?

[ASB]

So if the dividend is paid net, does that mean the company pays the tax just like with PAYE?

No. The tax is notional.

I assumed the company wouldn't pay any tax on the dividend,

Correct

and it was up to the director to pay any tax owed at the end of the year, or after self assessment?

Correct but only applicable with a higher rate tax payer.

The mechanics of the calculation are difficult to put into words dues to the bizarre way our government likes to meddle. However if you use something like digita.com you can put in loads of number, have it do the calculation and you will see what gets offset against what.