Corporation Tax & Dividends

[Maslins]

Effective rate of tax on dividends for higher rate taxpayers is currently 25%.

Actual rate is 32.5%, but the notional tax credit of 10% brings this down to 25%, example below shows how it works:

Cash dividend paid = £900
Notional tax credit = £100
Taxable gross dividend = £1,000
Tax on gross dividend = £325 (32.5%)
Less notional tax credit of £100 = net tax paid = £225
Net tax as a proportion of cash dividend = £225/£900 = 25%

Slightly anal I know, but there seem to be a few varying percentages flying around, thought I'd clarify...

[TroubleAtMill]

I've just checked my spreadsheet and I was slightly wrong.

If you give yourself divs of 40K, the total, for tax calculation purposes, is actually 44K as this includes the 10% credit. So,

28K will be taxed at 10% = 2.8K
16K will be taxed at 32.5% = 5.2K

The total tax is 8K. The 10% (4K) is then re-applied, so your final liability is 4K.


Again, it's a bit more complex than my example and it's definitely worth getting advice. And it's late and I've had a couple of drinks so my maths my be off

[BiggieBig]

oh ok

I think I get it now

thanks guys was so confused about all that.

:-)

[TroubleAtMill]

Dividends that take your total income up-to the higher-rate threshold is liable to 10% tax. Anything above is liable at 32% (or thereabouts). However, divs are automatically taxed at 10% (through corp tax) so the effective tax rates are 0% and 22%.

For example, let's say the threshold is 40K: you pay yourself 12K in salary and give yourself 40K in divs. The first 28K of the divs is taxed at 0%, but the next 12K will be taxed at 22%.

By paying a small a salary as possible you increase the amount of divs that is 'tax-free'. Of course, it's a bit more complex as you need to take into account allowances, add bank interest, rental income etc, which reduces that amount.

[blacjac]

You don't pay the 10%, its notional.

Took me a while to get my head round it too, but basically, the compay pays 21% corporation tax on all profits and that's it. When the company pays it's shareholders a dividend, it also issues them with a voucher that shows the amount of the dividend + this notional amount (e.g. if the dividend is 1000, then the voucher shows 1100). This 10% tax amount is deemed to have already been paid as part of the corporation tax.

However if the dividend puts you into the higher rate, you have to pay a bit more.

[BiggieBig]

does that mean even declaring dividends at lower tax rate means

21% corporation tax
10% Dividend tax

means i'll be paying 31% in total.

obviously I'm not understanding something fundamental

because accounts advise on paying as minimal salary as possible

[xoggoth]

CT is based on profits in the year, dividends are paid from what's left and don't affect it.

As you say, they do count towards your income for higher rate tax but if you defer to a year of similar or greater income you will pay higher rate on it anyway. Only significant advantage of deferment I can think of is if deferred until future years with little or no work when you can pay out and be well under the higher rate.

Don't know of any time limits on carrying money forward in the company. never earned enough to try it.

[Maslins]

You'll pay corporation tax on it at 21% regardless of whether you draw the money out as dividends or not.

You'll pay an effective rate of 25% personal tax on dividends paid in the higher rate band.

If you're likely to be earning enough to be in the higher rate band for a while, you either accept the fact that you'll pay 25% personal tax on some of it, you leave it in the company indefinitely (potential capital treatment if you wind the company up in many years time), or you try to divert profits to a spouse or similar who may have lower earnings.

[BiggieBig]

Hi all,

Bit confused over Corporation Tax.

I'm gonna get close to hitting the higher tax bracket this year due. I have been advised to keep a watch on my dividends so that I don't hit the higher tax bracket.

I believe for the higher tax band my dividends will be taxed at 30%

however if I leave this money in the company won't it get taxed anyway

1) Leave in company until end of year accounts: Cooperation tax (21%) and then tax when I declare dividends
2) Take out money next tax year: Assume I want to take it out next tax year will I not get taxed the same amount anyway as i'll be hitting the higher tax band (Assuming I continue on my contract)