Dividend tax limit

[Manic]

Yes you can, as Craig outlined. Taxpayers are allowed to use their personal allowance in whichever way is most beneficial to them.

Personal Allowances and Dividend Income

Allocating £2k of your personal allowance to dividends doesn't change the order in which they are taxed - they are still taxed as the top slice of income and the extra £2k does still sit above the higher rate threshold, but because you've allocated £2k of your personal allowance to the first £2k, that £2k above the higher rate threshold now becomes the first £2k of taxable dividends and is therefore covered by the £2k dividend allowance.

Whether or not HMRC's own self-assessment software now does this automatically for you I do not know.

Edit: from the horse's mouth, example 6:
Dividend Allowance factsheet - GOV.UK

Well blimey, every day is a school day. That is well hidden away in the gov site and I can't find any reference to it anywhere.

[DeludedKitten]

[TheCyclingProgrammer]

You can't choose to allocate your PA against dividend income.

Yes you can, as Craig outlined. Taxpayers are allowed to use their personal allowance in whichever way is most beneficial to them.

Personal Allowances and Dividend Income

Allocating £2k of your personal allowance to dividends doesn't change the order in which they are taxed - they are still taxed as the top slice of income and the extra £2k does still sit above the higher rate threshold, but because you've allocated £2k of your personal allowance to the first £2k, that £2k above the higher rate threshold now becomes the first £2k of taxable dividends and is therefore covered by the £2k dividend allowance.

Whether or not HMRC's own self-assessment software now does this automatically for you I do not know.

Edit: from the horse's mouth, example 6:
Dividend Allowance factsheet - GOV.UK

[Manic]

I was wrong

[WordIsBond]

Ignoring any NIC calculations, the income tax would be £400 yes. The CT saving would be £380 so you'd lose £20 which I guess is immaterial. In the OP scenario, if swapping a £2k dividend for a £2k salary, the tax would be essentially the same but the overall net income would drop by about £240.

For your employee, I'm not sure what the best solution would be. If the £2k is front loaded in one month, there will be EE NIC of approx. £150 so they'd have a net pay of £1,850.

Just to add to the OP, if they received child benefit, then consider whether you want to take a dividend higher than £2k as this would then affect what you repay back as a higher child benefit charge as you'll show income over £50k.

Thanks Craig. Hadn't thought through the NIC factor very well, and should have. It's a moot point for us.

[Craig@Clarity]

Great post, Craig, thanks. Now a question.

Is my idea of paying himself £2K salary and then a £2K dividend sound? That would also cost him £400 but give savings on CT, wouldn't it?

It's not just a theoretical question for an employee just starting with me, we're trying to figure the best way to put some money in his hands.

Ignoring any NIC calculations, the income tax would be £400 yes. The CT saving would be £380 so you'd lose £20 which I guess is immaterial. In the OP scenario, if swapping a £2k dividend for a £2k salary, the tax would be essentially the same but the overall net income would drop by about £240.

For your employee, I'm not sure what the best solution would be. If the £2k is front loaded in one month, there will be EE NIC of approx. £150 so they'd have a net pay of £1,850.

Just to add to the OP, if they received child benefit, then consider whether you want to take a dividend higher than £2k as this would then affect what you repay back as a higher child benefit charge as you'll show income over £50k.

[WordIsBond]

Let me clarify this for you assuming you have a full personal allowance of £12,500 in this tax year.

On a salary of £48,000, your income tax bill is £7,100 in this tax year being (£48,000 - £12,500) x 20%.

If you paid yourself a dividend of £2,000, your total income is £50,000 made up of £48,000 salary and £2,000 dividend. You get a dividend tax allowance (DTA) of £2,000, so this leave the remaining £48,000 less your personal allowance @ 20% = £7,100

If you paid yourself a dividend of £4,000, your total income is £52,000 made up of £48,000 salary and £4,000 dividend. In this scenario, you're into the higher rate tax band by £2,000. This is where a bit of tax knowledge comes into play. You allocate £2,000 of your personal allowance to the dividend and £10,500 against your salary. This leaves you with tax on salary of (£48,000 - £10,500) @ 20% = £7,500 and remaining dividend of £2,000 is covered by the DTA.

In summary:

Total income £52,000 (£48,000 salary + £4,000 dividend)
Less Personal Allowance £12,500 (£10,500 to salary + £2,000 to dividends)
Total taxable income £39,500 (£37,500 salary + £2,000 dividends

Tax due £7,500 (£37,500 @ 20% + £2,000 @ 0% {DTA})


In short, if you pay yourself a £2k dividend it'll not cost you anymore tax than what has been deducted from your salary.
If you pay yourself a £4k dividend, it'll cost you an extra £400 (£2k @ 20% as oppose to £2k @ 32.5%)
Any dividend excess over £4k will be at 32.5%

Great post, Craig, thanks. Now a question.

Is my idea of paying himself £2K salary and then a £2K dividend sound? That would also cost him £400 but give savings on CT, wouldn't it?

It's not just a theoretical question for an employee just starting with me, we're trying to figure the best way to put some money in his hands.

[Craig@Clarity]

Online calculators give different results so thought I would ask you guys
Salary paye earned of 48k but I also have part time contract through my limited company with profits I can draw as dividends. No salary taken from the company so only corp tax will be due.

Question is the £2k tax free allowance, will that be added to the £48k so anything above the initial £2k will be taxed at 32.5% ? Or will £2k be tax free, the following £2k at 7.5% and anything above that at the 32.5% ?

Also is it worth splitting some dividend this year and the rest after April ?

The company will lay dormant after feb as I have a full time position earning paye

Thanks guys any advice would be appreciated

Let me clarify this for you assuming you have a full personal allowance of £12,500 in this tax year.

On a salary of £48,000, your income tax bill is £7,100 in this tax year being (£48,000 - £12,500) x 20%.

If you paid yourself a dividend of £2,000, your total income is £50,000 made up of £48,000 salary and £2,000 dividend. You get a dividend tax allowance (DTA) of £2,000, so this leave the remaining £48,000 less your personal allowance @ 20% = £7,100

If you paid yourself a dividend of £4,000, your total income is £52,000 made up of £48,000 salary and £4,000 dividend. In this scenario, you're into the higher rate tax band by £2,000. This is where a bit of tax knowledge comes into play. You allocate £2,000 of your personal allowance to the dividend and £10,500 against your salary. This leaves you with tax on salary of (£48,000 - £10,500) @ 20% = £7,500 and remaining dividend of £2,000 is covered by the DTA.

In summary:

Total income £52,000 (£48,000 salary + £4,000 dividend)
Less Personal Allowance £12,500 (£10,500 to salary + £2,000 to dividends)
Total taxable income £39,500 (£37,500 salary + £2,000 dividends

Tax due £7,500 (£37,500 @ 20% + £2,000 @ 0% {DTA})


In short, if you pay yourself a £2k dividend it'll not cost you anymore tax than what has been deducted from your salary.
If you pay yourself a £4k dividend, it'll cost you an extra £400 (£2k @ 20% as oppose to £2k @ 32.5%)
Any dividend excess over £4k will be at 32.5%

[Craig@Clarity]

Yes

No

[Manic]

Yes

[TylerSigma]

Thanks for the feedback guys, If i am correct i will take the first £2k @0% But then this will take earnings in total upto £50k+ so anything more dividends taken will be at the higher rate tax of £32.5%.

Maybe taking £2k+ now and leave £2k in the profits to take after April ( new tax year ) so it can be taken tax free as the allowance ?

Does that sound a plausible plan ?

[Manic]

Working out tax on dividends
How much tax you pay on dividends above the dividend allowance depends on your Income Tax band.

Tax band Tax rate on dividends over the allowance
Basic rate 7.5%
Higher rate 32.5%
Additional rate 38.1%
To work out your tax band, add your total dividend income to your other income. You may pay tax at more than one rate.

From here Tax on dividends - GOV.UK

[WordIsBond]

This goes back and forth. If you paid yourself a £4K dividend, would you get 2K at 0% (the first 2K) and 2K taxed at 32.5% (the last 2K)? Or would you get 2K at 7.5% and 2K taxed at 0%?

If I remember correctly, there was HMRC guidance that suggested the former that has now been changed to suggest the latter. But I can't find it (maybe someone else knows where it is), and I can't tell you for certain that the HMRC guidance would be accurate -- they mess up all the time.

There might be an easy way to not have to find out. Did you have profit in the current company tax year?

If so, pay yourself a £2K salary, which will reduce your profit and corporation tax. You'll pay 20% income tax but the CT savings make the cost virtually nil. If you've had no salary from the company yet this year, there won't be any NI on income at those levels.

Then, pay yourself an additional £2K dividend to use the dividend allowance.

Even if you didn't have profit, this might be worth doing. It's £2K at 20% and £2K at 0%. Not too bad.

[SeededLoaf]

You can take a £2K dividend tax free. Then anything above £50K is taxed at 32.5%. HMRC counts your income from PAYE, pensions and property before dividends when working out your dividend tax bill.

Have you considered paying a chunk into pension?

[TylerSigma]

Online calculators give different results so thought I would ask you guys
Salary paye earned of 48k but I also have part time contract through my limited company with profits I can draw as dividends. No salary taken from the company so only corp tax will be due.

Question is the £2k tax free allowance, will that be added to the £48k so anything above the initial £2k will be taxed at 32.5% ? Or will £2k be tax free, the following £2k at 7.5% and anything above that at the 32.5% ?

Also is it worth splitting some dividend this year and the rest after April ?

The company will lay dormant after feb as I have a full time position earning paye

Thanks guys any advice would be appreciated