Share divis and tax bands.
Discussion
The taxation of dividends was made inordinately complicated and confusing by Gordon Brown in 1998.
Every dividend paid is "assumed" to have been paid with 10% tax already deducted on it. Therefore, if you pay yourself a Dividend of £9,000 into your hand, it is DEEMED that you have actually paid out a tax inclusive dividend of £10,000 with a £1,000 Tax Credit attached.
When working out what tax bands apply to this dividend, you MUST look at the Tax Inclusive value of the dividend, not the Tax Exclusive value.
So, lets look at an example of someone who is only paid dividends and has no other income of any other kind.
For 2007/08 the situation might be:
Individual receives "Net" dividends of £50,000 in the year to 5 April.
For tax computation purposes he is "deemed" to have received a tax inclusive dividend of £55,555.(Gross £55,555.55, Tax £5,555.55 Net £50,000.00)
For 2007/08 the first £5,225 of an individual's income is covered by the annual tax free allowance.
Therefore £50,330 of th dividend income is potentially taxable.
However, the next £34,600 of income is covered by the 10% and 22% tax bands leaving only £15,730 in the higher rate band.
This is where the tax rules get REALLY weird.
All the dividend amount falling in the 10% and 22% band is not taxed AT ALL.
The remaining dividend of £15,730, whilst falling in the Higher Rate Band is taxed at a special Dividend Rate of 32.5% instead of the normal Higher Rate of 40%.
And, to cap it all, the 10% tax credit shown on the original dividend voucher was never really deducted and paid to the Revenue.
Every dividend paid is "assumed" to have been paid with 10% tax already deducted on it. Therefore, if you pay yourself a Dividend of £9,000 into your hand, it is DEEMED that you have actually paid out a tax inclusive dividend of £10,000 with a £1,000 Tax Credit attached.
When working out what tax bands apply to this dividend, you MUST look at the Tax Inclusive value of the dividend, not the Tax Exclusive value.
So, lets look at an example of someone who is only paid dividends and has no other income of any other kind.
For 2007/08 the situation might be:
Individual receives "Net" dividends of £50,000 in the year to 5 April.
For tax computation purposes he is "deemed" to have received a tax inclusive dividend of £55,555.(Gross £55,555.55, Tax £5,555.55 Net £50,000.00)
For 2007/08 the first £5,225 of an individual's income is covered by the annual tax free allowance.
Therefore £50,330 of th dividend income is potentially taxable.
However, the next £34,600 of income is covered by the 10% and 22% tax bands leaving only £15,730 in the higher rate band.
This is where the tax rules get REALLY weird.
All the dividend amount falling in the 10% and 22% band is not taxed AT ALL.
The remaining dividend of £15,730, whilst falling in the Higher Rate Band is taxed at a special Dividend Rate of 32.5% instead of the normal Higher Rate of 40%.
And, to cap it all, the 10% tax credit shown on the original dividend voucher was never really deducted and paid to the Revenue.
Hi Eric,
Apart from the amusing irony of blaming the OP's namesake for the errors of this
I am still a little confused.
Could you possibly run through it again, with a couple of round numbers?
For example, let say for the sake of argument, what is the taxation situation for corporation tax and income tax if I were to pay myself up to the tax boundary of £5225, and then for the sake of argument my Ltd co made £10,000 of profit of which all of this I wanted as a dividend?
Thanks in advance!
Apart from the amusing irony of blaming the OP's namesake for the errors of this
I am still a little confused.Could you possibly run through it again, with a couple of round numbers?
For example, let say for the sake of argument, what is the taxation situation for corporation tax and income tax if I were to pay myself up to the tax boundary of £5225, and then for the sake of argument my Ltd co made £10,000 of profit of which all of this I wanted as a dividend?
Thanks in advance!
OK
You draw a cheque from the company for £10,000 and stick it in your personal bank account.
Youi draft up a dividend voucher to cover this payment. The dividend voucher will show the following:
Net Dividend - £10,000.00
10% Tax Credit £1,111.11
When entering the details of this dividend on your next Self Assessment Tax Return you will enter the foloowing in the appropriate boxes:
Tax Inclusive Gross Dividend - £11,111.11
Tax Credit - £1,111.11
Net Tax Exclusive Dividend - £10,000.00
The summary of your income for the year will be as follows:
Gross Salary - £5,225.00
Gross Dividend - £11,111.11
Total Income for year £16,336.11
Less: Personal Allowances £5,225.00
Taxable Income for year £11,111.11
The Tax Credit of 1,111.11 is deemed to have cleared any unpaid tax liabilities arising on the taxable income reldted to the dividend received and the Revenue will not want you to pay any "further" tax. Of course, no tax has actually been paid at all on any of this income so far and nothing else is due.
Regarding the Corporation Tax situation. Your company had £10,000 net profit at the end of its year. It was this profit which enabled you to draw the dividend. Corporation Tax of 20% (i.e £2,000) will be payable on the £10,000 profit. Next year i.e. 1 April, this rises to 21% and on 1 April 2009 it rises to 22%.
You draw a cheque from the company for £10,000 and stick it in your personal bank account.
Youi draft up a dividend voucher to cover this payment. The dividend voucher will show the following:
Net Dividend - £10,000.00
10% Tax Credit £1,111.11
When entering the details of this dividend on your next Self Assessment Tax Return you will enter the foloowing in the appropriate boxes:
Tax Inclusive Gross Dividend - £11,111.11
Tax Credit - £1,111.11
Net Tax Exclusive Dividend - £10,000.00
The summary of your income for the year will be as follows:
Gross Salary - £5,225.00
Gross Dividend - £11,111.11
Total Income for year £16,336.11
Less: Personal Allowances £5,225.00
Taxable Income for year £11,111.11
The Tax Credit of 1,111.11 is deemed to have cleared any unpaid tax liabilities arising on the taxable income reldted to the dividend received and the Revenue will not want you to pay any "further" tax. Of course, no tax has actually been paid at all on any of this income so far and nothing else is due.
Regarding the Corporation Tax situation. Your company had £10,000 net profit at the end of its year. It was this profit which enabled you to draw the dividend. Corporation Tax of 20% (i.e £2,000) will be payable on the £10,000 profit. Next year i.e. 1 April, this rises to 21% and on 1 April 2009 it rises to 22%.
Edited by Eric Mc on Sunday 10th February 13:33
That is the first time anyone has even got close to explaining that for me, thanks Eric.
So basically if I intend to draw £40K HMRC will assume it is £44K. To keep under the £40K I should draw only £36.5K which HMRC will see as £44,150.
And I will pay 32% on anything over that figure, bearing in mind to add any BIK and any savings interest?
So basically if I intend to draw £40K HMRC will assume it is £44K. To keep under the £40K I should draw only £36.5K which HMRC will see as £44,150.
And I will pay 32% on anything over that figure, bearing in mind to add any BIK and any savings interest?
Edited by Gordon Brown on Sunday 10th February 16:32
Eric Mc said:
OK
You draw a cheque from the company for £10,000 and stick it in your personal bank account.
Youi draft up a dividend voucher to cover this payment. The dividend voucher will show the following:
Net Dividend - £10,000.00
10% Tax Credit £1,111.11
When entering the details of this dividend on your next Self Assessment Tax Return you will enter the foloowing in the appropriate boxes:
Tax Inclusive Gross Dividend - £11,111.11
Tax Credit - £1,111.11
Net Tax Exclusive Dividend - £10,000.00
The summary of your income for the year will be as follows:
Gross Salary - £5,225.00
Gross Dividend - £11,111.11
Total Income for year £16,336.11
Less: Personal Allowances £5,225.00
Taxable Income for year £11,111.11
The Tax Credit of 1,111.11 is deemed to have cleared any unpaid tax liabilities arising on the taxable income reldted to the dividend received and the Revenue will not want you to pay any "further" tax. Of course, no tax has actually been paid at all on any of this income so far and nothing else is due.
Regarding the Corporation Tax situation. Your company had £10,000 net profit at the end of its year. It was this profit which enabled you to draw the dividend. Corporation Tax of 20% (i.e £2,000) will be payable on the £10,000 profit. Next year i.e. 1 April, this rises to 21% and on 1 April 2009 it rises to 22%.
Thats brilliant Eric, many thanks!You draw a cheque from the company for £10,000 and stick it in your personal bank account.
Youi draft up a dividend voucher to cover this payment. The dividend voucher will show the following:
Net Dividend - £10,000.00
10% Tax Credit £1,111.11
When entering the details of this dividend on your next Self Assessment Tax Return you will enter the foloowing in the appropriate boxes:
Tax Inclusive Gross Dividend - £11,111.11
Tax Credit - £1,111.11
Net Tax Exclusive Dividend - £10,000.00
The summary of your income for the year will be as follows:
Gross Salary - £5,225.00
Gross Dividend - £11,111.11
Total Income for year £16,336.11
Less: Personal Allowances £5,225.00
Taxable Income for year £11,111.11
The Tax Credit of 1,111.11 is deemed to have cleared any unpaid tax liabilities arising on the taxable income reldted to the dividend received and the Revenue will not want you to pay any "further" tax. Of course, no tax has actually been paid at all on any of this income so far and nothing else is due.
Regarding the Corporation Tax situation. Your company had £10,000 net profit at the end of its year. It was this profit which enabled you to draw the dividend. Corporation Tax of 20% (i.e £2,000) will be payable on the £10,000 profit. Next year i.e. 1 April, this rises to 21% and on 1 April 2009 it rises to 22%.
Edited by Eric Mc on Sunday 10th February 13:33
That was what I thought, it just sounded very strange, all this 'Tax Credit' stuff for tax and monies that are not paid...
Anyway, if that is how they want it, they can have it that way!
So, up to £34,600 the total taxes paid in this method is 20% between Ltd Co and Corp Tax?
Also, one last thing, how/why is the Tax credit calculated as £1,111 on £10,000? Cheers again!
(I am sure there is a more transparent way they could do this....!)
Its things like this where the tax rules really need simplifying. I honestly don't think anyone could ever have developed such a complex system unless they were trying to confuse people and create jobs for accountants and tax inspectors.
I'm an intelligent bloke, spend my life playing with complex maths and electronics and I've no real choice but to pay an accountant or spend half my life working out the peculiarities of an unnecessarily complex tax system.
I'm an intelligent bloke, spend my life playing with complex maths and electronics and I've no real choice but to pay an accountant or spend half my life working out the peculiarities of an unnecessarily complex tax system.
The 10% Tax Credit method of taxing Dividends replaced a system where there was a 20% tax Deduction on dividends. In the old system the 20% tax was genuinely deducted by the company paying the dividend and the tax was physically paid to the Revenue once every calendar quarter. The tax payer could thenm look on the 20% tax actuyally paid over as a "down payment" on their full tax liability on dividends for the year.
The company, in turn, were allowed treat the tax paid on the dividend as a part payment of their Corporation Tax liability (it was called Advance Corporation Tax or ACT).
The company, in turn, were allowed treat the tax paid on the dividend as a part payment of their Corporation Tax liability (it was called Advance Corporation Tax or ACT).
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