Reply to: Higher rate personal tax on dividends

[chuddy]

XL Monkey, thanks for the explanation. Makes a little more sense now

I think the key thing that confused me was the 10% credit. I originally thought that it had something to do with the Corporation Tax. Did not know that it was just a notional rate that was just chosen.

[XLMonkey]

The tax credit etc is solely so that the state can't take tax twice from the same income.

A company pays it's dividend to shareholders from profits after tax. It is taxed at 19%. So if it made 100 profit, then it has 81 pounds left to distribute

Shareholder receives 81 pounds in income. Fills in tax return. Thing is, if the shareholder then pays income tax, then the state will have collected twice (once through corporation tax, then through income tax). So, HMRC play a little maths game to ensure that he only pays tax once, until he gets to the higher rate tax threshold.

HMRC gives shareholder a notional tax credit of 1/9 of the dividend. So, 9 pounds (81/9). Shareholder declares on tax return both the dividend, and the credit, as income. So, he says

I got paid 90 pounds in income from dividends.

I owe you 10% of that (the effective rate for dividend income),
but I have already "paid" 9 of tax on it (that's the tax credit).

so keep your hands off my wad.

However, if the shareholder goes above the basic rate of income tax, then he owes 32.5% of the total (32.5% of 90), so he pays 29.25, split into

9 of tax credit
and
20.25 of additional income tax.

The marginal rate of tax on dividend income works out at
19% on income below the higher rate tax threshold, and
39.25% on income above it.

[boredsenseless]

Gonzo,

Thanks for clarification. I just spoke to somebody else and they told me that the tax credit of 10% actually eats into your lower threshold allowance. Is this true as well?

Is the following correct:

i.e. since lower threshold is £33 300, if my salary took me up to £33 100 then a dividend of £200 would actually take me over £33 300 since the £200 would in fact be seen as being worth (£200 + (£200/9)) £222.22. With this case I would have to pay tax at the higher threshold for the £22.22. Very odd...

Also, just to confirm, from my company's point of view, they have just given their shareholder £200 net of corporation tax.

Is this a mechanism to make companies give out more dividends instead of putting the money back into the business?? Does not seem to make much sense to me unless there is some specific tax loophole it is trying to close off.

Your company cannot give you £200 net of corporation tax, you can't pay corporation tax you are an individual.

The company may or may not have paid corporation tax on the profits before giving you the dividend, it's none of your business - however if you are also an office holder than you are bound to ensure that the correct CT is paid.

The Tax Credit is purley a slight-of-hand invented by the Tax Office to stop claims of double-taxation.

[TheFaQQer]

Personally I seem to be doing a good job of avoiding paying any corp tax. First months figures are in. Billed £5k ... left £1k

Fecking startup costs and accounts taking my money well I'll show them....grrrrr

With you on that one - just completed year one as My Ltd, and Mrs Faqqer keeps telling me that she thought there would be more money in the account! I keep having to remind her that the company has traded for a year, and I only contracted through it for 7 months...

[Gonzo]

You pay tax on your gross income.

So a dividend of £200 in your pocket is worth £222.22 when working out your income for tax purposes.

I haven't checked the rates recently so do not take my word for it but, from memory, your 10% tax credit covers the basic rate of tax (22%), so if you get any income over the higher rate threshold you owe another 18% of the gross amount over the threshold to the tax man.

[chuddy]

Gonzo,

Thanks for clarification. I just spoke to somebody else and they told me that the tax credit of 10% actually eats into your lower threshold allowance. Is this true as well?

Is the following correct:

i.e. since lower threshold is £33 300, if my salary took me up to £33 100 then a dividend of £200 would actually take me over £33 300 since the £200 would in fact be seen as being worth (£200 + (£200/9)) £222.22. With this case I would have to pay tax at the higher threshold for the £22.22. Very odd...

Also, just to confirm, from my company's point of view, they have just given their shareholder £200 net of corporation tax.

Is this a mechanism to make companies give out more dividends instead of putting the money back into the business?? Does not seem to make much sense to me unless there is some specific tax loophole it is trying to close off.

[Sockpuppet]

Personally I seem to be doing a good job of avoiding paying any corp tax. First months figures are in. Billed £5k ... left £1k

Fecking startup costs and accounts taking my money well I'll show them....grrrrr

[Gonzo]

Dividends are paid from net profit - ie amounts after taxes and expenses.

Crazy as it seems, dividends are received by individuals with the 10% tax credit however this satisfies the tax liability for lower rate tax payers who do not pay any further tax on that income.

[chuddy]

Do we get the 10% credit because HMRC are effectively charging only 9% for coroporation tax on any dividends that are given out? (19% charged, but individuals always get 10% credit?)

[chuddy]

The net dividend of £12960 would be £14400 gross less the £2224 would leave £12176 subject to Higher Rate tax, at an effective 22.5%, the tax would be £2739.60

Alan

Alan, quick question:

gross dividend = £14400
net dividend = £12960

i.e. 10% tax was paid. Why is this the case?

Are dividends paid after corporation tax and are they subject to both corporation tax AND personal investment income tax?

If the answer to the above is no, then if corporation tax was at 19% then should we not receive a tax credit of 9% for ammounts up to lower dividends tax threshold (19%-10%=9%) and then be taxed at 13.5%(32.5%-19%=13.5%) where in upper dividends tax threshold?

Any pointers appreciated

[Swamp Thing]

Thanks to Alan of Nixon Williams - a straightforward answer

[Nixon Williams]

I thought that £33,300 was including the £5,035?

I thought that the first 5k was tax free, the next 28k @ 24% and anything over at 40%?

No, the £33300 is added to the £5035 giving a total of £38335 before higher rate tax kicks in.

Alan

[Nixon Williams]

Can I get some advice on this board re. the amount of higher rate personal tax triggered on dividends?

My situation: For the 2006-07 tax year my salary will end up being £25K. No smart comments on this please – I have reasons for taking this much this year. Add to this an interim gross dividend already taken of £11,111. This brings my overall running income up to £36,111 for the year. I am now calculating that I have £2,224 left which is not subject to higher rate tax. This is arrived at as £33,300 basic/higher rate threshold + £5,035 personal allowance = £38,335. Subtract £36,111 current income = £2,224.

Now, having taken off the appropriate amount for corporation tax, I am intending to take a net dividend of £12,960. Is it correct to say that £12,960 - £2,224 = £10,736 and this is the amount subject to higher rate personal tax? If so, do I take a straight 25% off the £10,736?
Ta, Swampy.

The net dividend of £12960 would be £14400 gross less the £2224 would leave £12176 subject to Higher Rate tax, at an effective 22.5%, the tax would be £2739.60

Alan

[Sockpuppet]

This is arrived at as £33,300 basic/higher rate threshold + £5,035 personal allowance = £38,335. Subtract £36,111 current income = £2,224.

I thought that £33,300 was including the £5,035?

I thought that the first 5k was tax free, the next 28k @ 24% and anything over at 40%?

[rootsnall]

The higher rate tax issue will only kick in when you do your annual personal tax return ie. probably this time next year. Your Ltd Co accountant should be upto speed with all this !?

I do my self assesment online and everything is calculated for you as you enter your salary and dividend figures.