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Eek! Could someone answer a question for me about dividend tax?

(17 Posts)
writingquestion Sun 01-Dec-13 19:13:38

I run a small limited company and this is my first year of trading. I'm trying to work out my tax position. This first year is a bit unusual because I have had a salary this year (as a self employed contractor) of about £45k. Clearly I pay income tax on this at higher rate. Does this then mean I can't benefit from the dividend tax position? So if I pay myself a dividend of £32,010 is the dividend tax rate on this still 10 percent (reduced to zero because of the tax credit) or is it treated though I'm a higher rate tax payer and taxed at the 32.5 rate (reduced to 22.5 because of the tax credit)

I've just read two completely conflicting articles on the internet. First says I can earn (in salary) my personal allowance of £9440 each year plus the £32010k i.e. I can earn £41,450 without tax. Other seems to imply they are offset so if I earned salary of £9440 I can only take £22570 as a dividend (at 10 percent with a tax credit of 10 percent) so effectively £32,010 without tax.

I am aware by the way that I have to pay 20 percent corporation tax too.

I will have an accountant involved but am just trying to work out roughly what my income is likely to be.

writingquestion Sun 01-Dec-13 19:35:02

Hmm think I'm being stupid here now that I've read the HMRC website.

tax efficient route is personal allowance in salary plus rest in dividends right? so effectively because of the corporation tax I pay 20 percent on the chunk from £9440-£41450 (the same as if I just took it as salary). So the saving comes on the NI.

Anyone know if this is this right?

PigletJohn Sun 01-Dec-13 20:05:15

you make a financial gain by saying that some of the money you earned was dividends, because you don't pay NI on it.

You say you are a self-employed contractor. You might be in a business where HMRC treats that as a (very well-known) fiddle (even though you might prefer to describe it a tax-efficient). It will be easier for you if you had several concurrent clients in different places.

You might consider having some of it as company contributions to your pension scheme instead, or possibly carrrying some of it foward to pay as salary in a future year when trade is not so good.

MyBachisworsethanmybite Sun 01-Dec-13 20:08:44

All your income is added up to decide what rate of tax you pay on the various chunks. So you can't have £45k of salary AND £32k of dividend both taxed at the basic/divi rate. Once you've used up your basic rate capacity the rest is taxed at higher rate.

WhereMyMilk Sun 01-Dec-13 20:19:41

I always thought dividends were different to your salary-you pay higher rate on your salary & 20% on any dividend you take (obviously you will have Already paid corporation tax on the same money from the company...)

MyBachisworsethanmybite Sun 01-Dec-13 20:21:48

Plug your figures into Moneysavingexpert's tax calculator.

PigletJohn Sun 01-Dec-13 20:28:37


It is Income Tax not Salary Tax.

Salary is income. Dividends are income. Interest earned is income. Fundamentally you add up all your income to see how much income tax you pay.

Avoiding NI, especially employers NI if you own the company, is worthwhile but is a well-known dodge and you may not get away with it.

If the company e.g. contributes to a pension fund, that is not salary or income (since the money never passes through your hands) so is not subject to NI or income tax. This is very worthwhile.

catellington Sun 01-Dec-13 20:37:44

Non savings income, ie in your case salary is taxed as the first 'slice' of your taxable income. Any savings income is taxed as the next 'slice' with dividends usually taxed as the top 'slice'.

You say you have received salary - if the amount paid wasn't properly declared as a dividend then it is not in fact a dividend.

There is a tax saving where dividends are paid rather than salary, but you should ensure sufficient is paid as salary to maintain NICs record and to make life easier if there happens to be a challenge regarding whether you are paid the national minimum wage.

Your accountant ought to help you with all of this, as it's all dependent on individual circumstances.

catellington Sun 01-Dec-13 20:44:39

pigletjohn there are rules stating the order in which income is taxed.

writingquestion Sun 01-Dec-13 20:52:07

Think I'm straight on this. Apologies if my first post wan't very clear. I have been working as a contractor to several organisations for the first few months of this tax year. This money was earned by me as a self employed person (effectively as a sole trader I guess). I pay the tax through self assessment. This isn't a "fiddle" its just fact. I'm not trying to declare this income as a dividend.

I've now set up a limited company and am a company director. So for the rest of this tax year I would be better off paying myself by means of a dividend (due to the fact that NI isn't payable on dividend income).

Next year I pay myself a small salary to get covered off re NI and then use dividends.

Thanks all.

catellington Sun 01-Dec-13 21:03:35

Ok that makes much more sense!

Talkinpeace Sun 01-Dec-13 22:10:36

why not just defer the income into the next tax year and stay within basic rate ?
what does your accountant say?

PigletJohn Mon 02-Dec-13 00:43:47

yes, it can be very convenient to hold a buffer in the business, to even out peaks and troughs in trade, or in case you should be unfortunate enough to have an illness or accident.

writingquestion Mon 02-Dec-13 10:00:20

Would be a good plan Talkinpeace but I left a very well paid job earlier in the year and have the world's largest mortgage and school fees to pay so we're used to having the income each month. Plus I'm hoping I'll be a higher rate tax payer next year too!! Fingers crossed!!

manzanillaplease Mon 02-Dec-13 10:13:21

Ask your accountant about Director's Loans.

You can afford an accountant - a good one will save you a lot more than their fees - this board is not a good place for higher rate tax payers owning limited companies to get tax advice!

Talkinpeace Mon 02-Dec-13 11:23:26

there is a big difference between cashflow and stated profit wink
2 plus 2 is between 3 and 5 depending on why you need to know
talk to your accountant - they will save you a LOT of money if you are higher rate grin

writingquestion Mon 02-Dec-13 18:58:27

I wil guys. I have someone lined up its just finding the time to go and see them!

Thanks for all your help

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