Changes to dividend tax credit.
Discussion
So the headline summary from the budget (on the BBC) is that the Dividend tax credit is to be replaced by a £5000 allowance and then taxed at 7%, 32.5% and 38.1% (who knows wtf they choose such numbers). But it doesn't say where the thresholds are.
Can someone explain?
I guess this means I pay tax on dividends but at what rate for say £25k a year?
Can someone explain?
I guess this means I pay tax on dividends but at what rate for say £25k a year?
Edited by FredClogs on Wednesday 8th July 15:25
PurpleMoonlight said:
I think you discard the first £5000, then add the net dividend to your salary and pay 7.5% tax up to the 40% income tax threshold, then the next level up to the 45% tax threshold then the highest level thereafter.
There will no longer be such thing as a gross and net dividend, this was only created by the tax credit. It will work as follows
Salary - 11k - £0 tax
First £5k Dividend - £0 tax
Dividend £5k-£32k - up to £27k taxed at 7.5 % - £2,025 Tax (max)
Dividends £32k -£150k - up to £118k taxed at 32.5%
Dividends over £150k - taxed at 38.1%
PurpleMoonlight]heHound said:
There will no longer be such thing as a gross and net dividend, this was only created by the tax credit.
The net dividend is the actual payment received, ie the gross dividend less 20% deducted by the dividend payer.
Very funny, The net dividend is the actual payment received, ie the gross dividend less 20% deducted by the dividend payer.
You know what I meant.
In the current system the net dividend is the actual amount declared (before any tax calculations) and the gross dividend was with the tax credit added on to this.
and by the way a person in receipt of dividend doesn't pay 20% on it under any of the bandings (new or old)
TheHound said:
PurpleMoonlight]heHound said:
There will no longer be such thing as a gross and net dividend, this was only created by the tax credit.
The net dividend is the actual payment received, ie the gross dividend less 20% deducted by the dividend payer.
Very funny, The net dividend is the actual payment received, ie the gross dividend less 20% deducted by the dividend payer.
You know what I meant.
In the current system the net dividend is the actual amount declared (before any tax calculations) and the gross dividend was with the tax credit added on to this.
and by the way a person in receipt of dividend doesn't pay 20% on it under any of the bandings (new or old)
The aim seems to be to stop people (like me) from turning earnings via a company into dividends that suffer income tax only at standard rates with no national insurance. He just made the tax system a load more complex. I worked out yesterday that the effective tax rate on dividend income for a higher rate (40% tax payer is now 46% - and that barely falls when CT drops to 19% and then 18% in the next few years. So adding in the loss of child benefit (about 1800 pa - lost over the £10k of pre-tax income from 50k-60k) I will be facing a marginal tax rate on some of my income of 64%...
I am not complaining, though it will cost me around £3.5k - £4k+ pa. The choice is then to go self-employed and suffer nic at 9% on profits from 8k-42k pa and 2% thereafter with tax at 20% / 40% vs tax at 0% on the first £11k, then 20% (in the company) on the next £5k, then 26% on the next bit to the higher rate threshold (losing the will to live but I think around £26k-£27k) and then 46% after that! (ignoring child benefit loss which falls in there somewhere at 18%
I predict lots of disincorporation - possibly followed by GO increasing national insurance on self-employed people (in the USA there is an employee and employer national insurance equivalent tax paid by self-employed people to remove that incentive to go self-emp)
So previously, if you took somewhere between 30-40k, you could have an effective tax rate of 20% (just corp tax, no further income tax)
And now this will jump to something more like and effective 25%-30% with this new tax on dividends.
b
ks to this I'm incorporating offshore 
Is there any way around things now to be tax efficient, if one intends to draw just under higher rate bracket from their companies each year? Other than just leaving it building in the company etc etc..
And now this will jump to something more like and effective 25%-30% with this new tax on dividends.
b
ks to this I'm incorporating offshore Is there any way around things now to be tax efficient, if one intends to draw just under higher rate bracket from their companies each year? Other than just leaving it building in the company etc etc..
At the simplest and in round numbers,
By the way, the 7.5% additional tax collected by George Osbourne isn't a 7.5% tax increase. If your tax was 20% previously and is now 27.5% that's a tax increase of 33%
- Companies pay tax at 20%. Half of that used to be credited back to someone who received a dividend.
- Someone who receives a dividend pays their own income tax as well - effectively double tax on company profits.
- Gordon Brown banned pension schemes and ISAs from claiming the 10% tax credit - he kept it for himself.
- George Osbourne has now made all dividends the same as for pension schemes and ISas - he keeps it all for himself.
- So now the company pays 20% tax and the recipient of the dividend pays their own full rate of income tax as well. The overall effect is that most company profits will be taxed at about 50% by the time they get into your hands.
By the way, the 7.5% additional tax collected by George Osbourne isn't a 7.5% tax increase. If your tax was 20% previously and is now 27.5% that's a tax increase of 33%
Wrong!
You do not pay your full rate of tax on dividends - 7.5% is not your full rate of tax... Effectively it has gone from 20% overall tax rate for a basic rate taxpayer to 26% (though first £5k is still at 20% effective rate) and from 40% to 46%
It is targeted at people who own incorporate instead of being self employed. The new rules balance it up a little - I haven't done the maths to see at what point it is worth being a partnership instead of a limited company - with a partnership or sole trade you pay 0% nic on first 8k, then 9% on next 34k (plus 20% tax) then 2% after that (that's all class 4 nic). All bands approximate!
The new dividend rules mean that the additional 6% tax on underlying profits (it's 6% because div rate is 7.5% x post corporation tax profit so x 80% of pre tax profit). But through a company assuming say £8k salary you then on dividends have 5k before suffering the extra 6%.
So I think there is a point where 6% on pre tax profits dividend extra tax will balance 9% then 2% nic
You do not pay your full rate of tax on dividends - 7.5% is not your full rate of tax... Effectively it has gone from 20% overall tax rate for a basic rate taxpayer to 26% (though first £5k is still at 20% effective rate) and from 40% to 46%
It is targeted at people who own incorporate instead of being self employed. The new rules balance it up a little - I haven't done the maths to see at what point it is worth being a partnership instead of a limited company - with a partnership or sole trade you pay 0% nic on first 8k, then 9% on next 34k (plus 20% tax) then 2% after that (that's all class 4 nic). All bands approximate!
The new dividend rules mean that the additional 6% tax on underlying profits (it's 6% because div rate is 7.5% x post corporation tax profit so x 80% of pre tax profit). But through a company assuming say £8k salary you then on dividends have 5k before suffering the extra 6%.
So I think there is a point where 6% on pre tax profits dividend extra tax will balance 9% then 2% nic
Ozzie Osmond said:
oop north said:
Wrong!
Which bit of "in round numbers" did you fail to understand, before wriggling about with Corporation Tax, NI and all the rest of it?The plain fact is it's a huge tax hike for a higher rate taxpayer who's relying on dividend income. HUGE!
I think all your bulleted points are wrong:
1. You said "Companies pay tax at 20%. Half of that used to be credited back to someone who received a dividend" - wrong, you never got half the corporation tax rate credited back to you - effectively you got a credit as if 20% back to you so as a 40% tax payer you then paid 20/80ths of the net dividend. With £100 profit, £20 went in CT, a basic rate taxpayer suffers no further tax so 20% deducted. With the same £100 profit and £20 CT, a higher rate taxpayer would suffer an additional £20 tax making a total of £40 deducted. The £10 was a red herring, really, that just confused things, though it did give you a bit less income subject to higher rate tax.
2. You said "Someone who receives a dividend pays their own income tax as well - effectively double tax on company profits" - as in the numbers above, there was no double tax - you got full credit for the basic rate tax equivalent paid.
3. Your said "Gordon Brown banned pension schemes and ISAs from claiming the 10% tax credit - he kept it for himself" - I don;t think it was the 10% credit that he stopped - it was the recovery of advance corporation tax which was never at 10% - see https://en.wikipedia.org/wiki/Advance_corporation_... for more details if you are interested in facts (which you might not be
)4. You said "George Osborne has now made all dividends the same as for pension schemes and ISas - he keeps it all for himself" - I have no idea what you are saying here - but I think it is complete nonsense... - dividends received into ISAa and pension funds are not subject to additional tax (unlike dividends received in private hands above £5,000 limit) but that is no different in April 2016 from before
5. You said "So now the company pays 20% tax and the recipient of the dividend pays their own full rate of income tax as well. The overall effect is that most company profits will be taxed at about 50% by the time they get into your hands" again wrong - the rates paid by a basic rate taxpayer of 7.5% on dividends (in place of nothing) is not the full rate of 20% on the dividends - 7.5% is not the full rate of income tax. It works out as effectively 26% marginal rate on the underlying profits (when it was previously 20%)
So can I ask a question now? which part of WRONG do you not understand?
It may be a big tax hike (and I don;t think I said it wasn't) but you are still paying less tax and NIC combined through a company than if you worked as a sole trader or partner - and you have got away with a bigger benefit for years I expect. There's no good whining about being worse off when you are actually still better off than being forced into a sole trader / partnership position - particularly if the rumoured / expected increases to self-employed class 4 national insurance goes up to 12% to match employee national insurance contributions
As someone paying themselves through a company you are probably considerably better off than most of the population and there is a dirty great deficit to take care of so man up and pay your bit
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