Reply to: Does the £5k dividend allowance consume any of the basic rate band?

[TheCyclingProgrammer]

Am I right?

8K salary. So first 3K of dividend is tax free. (because allowance is £11K).

Then theres the first 5K after this - only more than this attracts dividend tax. Correct?

Yes, the £5k allowance applies to the first £5k of taxable dividends, i.e. those above the personal tax allowance. Likewise, its not used up by any dividends paid on shares in an ISA.

[barrydidit]

My accountants explained to me a million times.... but I still might be talking bollox.

I think you should update your sig with that pearl of wisdom

[psychocandy]

Am I right?

8K salary. So first 3K of dividend is tax free. (because allowance is £11K).

Then theres the first 5K after this - only more than this attracts dividend tax. Correct?

My accountants explained to me a million times.... but I still might be talking bollox.

[SeanT]

You *could* use a directors loan account but with great care: loan the company £5,000 then when you've issued your invoice - on 31/03 presumably - declare and pay the dividend of £5,000. Once the invoice is paid, repay the loan. Take care to get the paperwork right.

That's what I thought, but my accountant said "That’s correct, there wouldn’t be any benefit in you loaning the money to the Limited Company as this is then just paid back as a Directors Loan"

Hmm. I guess the distinction is whether I make the loan after the invoice...

[TheCyclingProgrammer]

The first £5K of any dividend income will always be taxed at 0%, regardless of your total income.

Employment income is taxed first so taking £5K of dividends won't, for example, push your salary up into a higher band but the dividends will "use up" part of whatever band you're in, i.e they will contribute towards your total income when figuring out what band of tax you're in.

[MarillionFan]

Just spotted this, had the same question. I'd hit 150k earlier in the year as a permie and was planning to take 5k tax free. I asked my accountant, but another contractor turned to me yesterday when discussing this and said that no, that was wrong and I would land up paying tax.

Now not so sure.

[Alan @ BroomeAffinity]

I'm interested in this too, although I may not be able to do anything about it regardless (my business is getting paid on 13th April for the work I'm doing in March, and won't have a penny to its name until then). If (theoretically) I can get an advance on my invoice to bring it into this tax year, but I've already earned a shade over £50k gross as an employee up until 24th Feb, would I still be able to declare a dividend and receive my £5k entitlement without paying tax? Is there another way out of this hole?

You *could* use a directors loan account but with great care: loan the company £5,000 then when you've issued your invoice - on 31/03 presumably - declare and pay the dividend of £5,000. Once the invoice is paid, repay the loan. Take care to get the paperwork right.

[SeanT]

I'm interested in this too, although I may not be able to do anything about it regardless (my business is getting paid on 13th April for the work I'm doing in March, and won't have a penny to its name until then). If (theoretically) I can get an advance on my invoice to bring it into this tax year, but I've already earned a shade over £50k gross as an employee up until 24th Feb, would I still be able to declare a dividend and receive my £5k entitlement without paying tax? Is there another way out of this hole?

[LondonManc]

Thanks everyone - that's really helpful. It's a fairly subtle point I see.

In Maslins example – the first £5k ‘uses up’ £5k of the basic rate band, and so the rest of the dividend will be taxed at 20% or 40% depending on the total comp including the £5k div allowance up to that point.

But as dividends are always taxed after employment income – the £5k dividend payment could never have an effect on employment taxation.

Thanks again all.

The best way of thinking about it in a full contracting year is to take you 11k employment income tax free, the 5k dividend tax free and then up to the 43k threshold in further dividends (that'll you pay 7.5% tax on). There's nothing wrong in taking more than that, you'll just be taxed at a far higher rate for doing so.

I suggested deferring to your accountant as they'll know where you're up to so far.

[booms]

Thanks everyone - that's really helpful. It's a fairly subtle point I see.

In Maslins example – the first £5k ‘uses up’ £5k of the basic rate band, and so the rest of the dividend will be taxed at 20% or 40% depending on the total comp including the £5k div allowance up to that point.

But as dividends are always taxed after employment income – the £5k dividend payment could never have an effect on employment taxation.

Thanks again all.

[Maslins]

I think the other commenters may have missed the point of your question...or perhaps I have.

The £5k dividend allowance is a tax free allowance, but it DOES also use up a chunk of your basic rate band. If you only take £5k (or less) in dividends then this is irrelevant. However where it can be relevant is if for example your salary from elsewhere took you to (say) £10k short of the higher rate band. You can only take £10k dividends before hitting higher rates, £5k of which would be tax free (covered by allowance) and £5k of which would suffer the basic rate, 7.5%.

[Louisa@AardvarkAccounting]

When you work out an individuals income tax liability, there is an order in which items are taxed:

1 - savings income
2 - non savings (employment income in this case)
3 - dividend income

So, your employment income will be taxed first at 20/40%. Then your dividends will be taxed, first £5,000 at 0%.

If you have additional dividends in excess of the £5,000, these will be taxed at the rate in which your income falls: BR 7.5%, HR 32.5%, AR 38.1%.

[RonBW]

Or is the £5k dividend allowance always independent of everything else, and should always been taken?

I don’t really need the money – just want to make sure I’m doing the most tax-efficient thing.

You can earn £5k in dividends at zero percent tax. If you haven't earned any dividends anywhere else, you may as well take £5k out of your company at 0% now anyway.

[diseasex]

Hi all,

I’ve seen some conflicting information about this – probably from when the £5k dividend allowance was first announced – so I just want to make sure I understand.

I’ve come from a permie job, and I’ve used up almost all of my basic rate band for the tax year already with the pay from that.

If I my company gives me a £5k dividend will that ‘use up’ any of my basic rate band? If so it would push almost £5k of my income into the 40% band.

Or is the £5k dividend allowance always independent of everything else, and should always been taken?

I don’t really need the money – just want to make sure I’m doing the most tax-efficient thing.

It's dividend allowance.
Which means it's DIVIDEND allowance
If you get dividends from stock market AND from your LTD they both contribute towards this allowance.
For example you gained 3000 dividends from stock market in 2017
your allowance is 2000 for your LTD left..


... independently from any PAYE or other tulip

[LondonManc]

I'll get roasted for this but you should really be having a long chat with your accountant about this. They can spend time with you and give you the full picture which will be much more useful than answers to the odd question on here.

I think you're dead right though; given that the OP is part way through a year, their accountant will be best placed to tell them what they can and cannot take at this point in time.