Tax on Dividends question for Accountants

[neoplasm]

How does dividend taxation work please? The self assessment form asks you to put dividends in as 'Net' i.e how much was actually taken out of the company in cash, I think. So say that is £45000.

When tax owed is calculated, the calculation changes this to Gross £50000 and that appears to be what you pay tax on when it calculates your 'Total Income Received', even though you actually only physically took £45000 - Dividends from UK companies (plus 10% tax credits) = £50000.

Is that right or have I done something wrong?

it is taxed at source ......

at least until 5th April it is

The 10% tax credit currently gets added back on to work out your total income, then deducted again so there is no extra tax to pay if the dividends fall within the basic rate band.

As Talkinpeace says, it's all change from 6 April.

The 10% tax credit is "notional", i.e. pretend. Never gets paid to anyone and completely pointless. Thanks to Gordon Brown who clearly thought it was a good idea - the pillock! It gets added to your net dividend, then your tax is calculated, and then it gets taken off the tax due, so absolutely zero effect, other than using up some of your tax band. Thank goodness it's finally being abolished as it's caused nothing but confusion and extra work for people for the last 15-20 years.

Thanks All - makes sense, in a messed up kind of way that doesn't surprise me at all now that I have had some dealing with the ludicrousness that is HMRC - such an important thing as a country's national taxation system and Tesco has a better and more efficient web portal that works better?

Why are self employed people annoyed about it being abolished it it was pointless? Doesn't that mean I will pay more tax on dividends?

Why are self employed people annoyed about it being abolished it it was pointless? Doesn't that mean I will pay more tax on dividends?

Yes, there's more tax to pay from 6/4/16 but that's completely different. Nothing to do with the "notional" tax credit. Company shareholders are annoyed because they have to pay more tax, not because the useless and irrelevant tax credits have been removed. The tax credits could have been removed years ago without increasing the tax liability, or they could have stayed despite the new tax. Two completely different things and just a coincidence (or tidying exercise) that they happen at the same time.

whats the "thing" that is making them pay more tax? change to a rate?

not the self employed
anybody who has income in shares - particularly small business owners

up till now any income up to the basic rate band in Dividends was deemed already taxed so no more bill to pay

from next month, the first £5000 is tax free, after that there is a rising bill to pay

its going to hit a lot of people with investment portfolios a LOT harder than they realise as well
in fact a LOT of Tory voters are going to really hate Gidiot Osborne by the summer when they realise what he has done

It will have a large impact on those who take their earnings as dividends. We will end up paying more tax than before.

Basically it adds an additional 7.5% tax charge to dividends.

You are taxed on each additional £ at your marginal rate, at present dividends are taxed as follows (by grossing up, taxing at 10%, 32.5% and 37.5% on basic, higher and additional rates then deducting the 10% tax credit);

Falling within basic rate band: no additional tax
Falling within higher rate band: 25% tax on the net dividend you receive.
Falling within additional rate: 30.6% tax on the net dividend you receive.
(The above is complicated slightly as dividends are grossed up, so you move to higher then additional rates before you might expect).

From 6 April 2016 they will be taxed as follows;
First £5,000 - 0% (it is important to distinguish this as 0% rather than exempt as it count towards your move between bands)
Remainder of basic rate band - 7.5%
Higher rate band - 32.5%
Additional rare band - 38.1%

You also need to be aware that the first payment of any additional tax won't kick on until Jam 2018 (for dividends received 6 April 2016 - 5 April 2017).
At that point as well as having to pay the additional tax, your 2017/2018 payments on account will also increase as they are based on your 2016/17 tax. So your January 2018 payment will be 1.5 x the extra tax.

I am a consultant and set up as a limited company last year. I haven't yet paid myself any dividends, so, am I right in thinking that if I want to take money out of the business I will pay less tax (it would be over £5k) if I do it before the rules change on April 6th?

I am taking a dividend out of my company before 6th April up to the top of the lower tax band, for that reason. You do need to show that the dividend you take is less than your profit minus Corp tax due. Then I will see what to do next year....

havenlady I've just done that too, today in fact. Seemed like the best thing to do after I googled it..