Income tax on dividends - allowances?
Discussion
Hi all, following the recent changes to the taxation of dividends, can anyone tell me if the Personal Allowance can be used against dividend income above the £5,000 dividend income allowance?
That is to say, if I have a standard £11,000 personal allowance on a 1100L tax code and my only source of income is £16,000 of dividends, will I pay tax on £11,000 of the dividends (£16k total less £5k divi allowance), or will I pay no tax at all?
That is to say, if I have a standard £11,000 personal allowance on a 1100L tax code and my only source of income is £16,000 of dividends, will I pay tax on £11,000 of the dividends (£16k total less £5k divi allowance), or will I pay no tax at all?
Eric Mc said:
The normal Personal Tax Allowance is used in exactly the same way it always has been. The new allowances are the £5,000 dividend allowance and the £1,000 bank interest allowance.
These are in addition to the normal Personal Tax allowance.
Thanks Eric and everyone else. These are in addition to the normal Personal Tax allowance.
A couple of follow up questions, if I may:
1. If a director loans money to the company and charges interest, does the company now pay him net of 20% tax like in previous years, or does it pay him gross and leave him to pay any tax due on it?
2. Am I right in thinking it's now actually more tax efficient to receive loan interest up to the higher rate threshold (as you only pay 20% basic rate income tax on any interest income above your allowances), rather than dividends (as dividends attract 20% corporation tax and 7.5% basic rate dividend tax)?
The background to my questions is that I'm trying to extract profits from my company in the most tax efficient way possible following the recent tax changes to dividends.
I'm wondering if the most efficient is salary for the first £8k p.a., then interest on a loan for at least £1k (as both these are tax deductible in the company and fall within my peronal tax allowances) then dividends for the remainder?
youngsyr said:
Thanks Eric and everyone else.
A couple of follow up questions, if I may:
1. If a director loans money to the company and charges interest, does the company now pay him net of 20% tax like in previous years, or does it pay him gross and leave him to pay any tax due on it? NO TAX NEEDS TO BE DEDUCTED AT SOURCE
2. Am I right in thinking it's now actually more tax efficient to receive loan interest up to the higher rate threshold (as you only pay 20% basic rate income tax on any interest income above your allowances), rather than dividends (as dividends attract 20% corporation tax and 7.5% basic rate dividend tax)? IN THEORY, YES, BUT THE COMPANY WOULD NEED TOP OWE AN AWFUL LOT TO THE DIRECTOR TO JUSTIFY THAT LEVEL OF INTEREST
The background to my questions is that I'm trying to extract profits from my company in the most tax efficient way possible following the recent tax changes to dividends.
I'm wondering if the most efficient is salary for the first £8k p.a., then interest on a loan for at least £1k (as both these are tax deductible in the company and fall within my peronal tax allowances) then dividends for the remainder?
A couple of follow up questions, if I may:
1. If a director loans money to the company and charges interest, does the company now pay him net of 20% tax like in previous years, or does it pay him gross and leave him to pay any tax due on it? NO TAX NEEDS TO BE DEDUCTED AT SOURCE
2. Am I right in thinking it's now actually more tax efficient to receive loan interest up to the higher rate threshold (as you only pay 20% basic rate income tax on any interest income above your allowances), rather than dividends (as dividends attract 20% corporation tax and 7.5% basic rate dividend tax)? IN THEORY, YES, BUT THE COMPANY WOULD NEED TOP OWE AN AWFUL LOT TO THE DIRECTOR TO JUSTIFY THAT LEVEL OF INTEREST
The background to my questions is that I'm trying to extract profits from my company in the most tax efficient way possible following the recent tax changes to dividends.
I'm wondering if the most efficient is salary for the first £8k p.a., then interest on a loan for at least £1k (as both these are tax deductible in the company and fall within my peronal tax allowances) then dividends for the remainder?
Eric Mc said:
youngsyr said:
Thanks Eric and everyone else.
A couple of follow up questions, if I may:
1. If a director loans money to the company and charges interest, does the company now pay him net of 20% tax like in previous years, or does it pay him gross and leave him to pay any tax due on it? NO TAX NEEDS TO BE DEDUCTED AT SOURCE
2. Am I right in thinking it's now actually more tax efficient to receive loan interest up to the higher rate threshold (as you only pay 20% basic rate income tax on any interest income above your allowances), rather than dividends (as dividends attract 20% corporation tax and 7.5% basic rate dividend tax)? IN THEORY, YES, BUT THE COMPANY WOULD NEED TOP OWE AN AWFUL LOT TO THE DIRECTOR TO JUSTIFY THAT LEVEL OF INTEREST
The background to my questions is that I'm trying to extract profits from my company in the most tax efficient way possible following the recent tax changes to dividends.
I'm wondering if the most efficient is salary for the first £8k p.a., then interest on a loan for at least £1k (as both these are tax deductible in the company and fall within my peronal tax allowances) then dividends for the remainder?
A couple of follow up questions, if I may:
1. If a director loans money to the company and charges interest, does the company now pay him net of 20% tax like in previous years, or does it pay him gross and leave him to pay any tax due on it? NO TAX NEEDS TO BE DEDUCTED AT SOURCE
2. Am I right in thinking it's now actually more tax efficient to receive loan interest up to the higher rate threshold (as you only pay 20% basic rate income tax on any interest income above your allowances), rather than dividends (as dividends attract 20% corporation tax and 7.5% basic rate dividend tax)? IN THEORY, YES, BUT THE COMPANY WOULD NEED TOP OWE AN AWFUL LOT TO THE DIRECTOR TO JUSTIFY THAT LEVEL OF INTEREST
The background to my questions is that I'm trying to extract profits from my company in the most tax efficient way possible following the recent tax changes to dividends.
I'm wondering if the most efficient is salary for the first £8k p.a., then interest on a loan for at least £1k (as both these are tax deductible in the company and fall within my peronal tax allowances) then dividends for the remainder?
What's a "reasonable" interest rate - I'd struggle to get secured debt finance for my business for less than 10% I suspect, so given that a director's loan would be unsecured, is 15%-20% p.a. reasonable? I'd quite happily park £10k to £20k in the business if it's going to pay me that kind of interest.
I bet HMRC reckons it's more like 8% - in which case I'd like to see them offer me an unsecured loan at that rate!
ETA: Just checked Funding Circle and (including fees) it seems the commercial rate would be between 9% and 15% p.a. for an unsecured loan.
Edited by youngsyr on Monday 18th July 19:39
I thought of this but discounted it as the saving isn't worth the hassle.
If your DLA is £10,000 and you charge 10% interest that's £1,000. The income tax is £200, net payment £800. If it was paid as a dividend instead the net payment would still be £800 and the dividend tax £60 assuming the £5000 allowance is already used up.
If your DLA is £10,000 and you charge 10% interest that's £1,000. The income tax is £200, net payment £800. If it was paid as a dividend instead the net payment would still be £800 and the dividend tax £60 assuming the £5000 allowance is already used up.
Except that income tax on the interest isn't £200 it's nil (£1000 allowance for basic rate taxpayer iirc but falls to £500 if higher rate)
On the tax courses I have been on, the lecturers have been saying that credit card rate may be appropriate (though some advisors they spoke to were advocating store card rates!) - if hmrc queried it you would have to justify to them the rate you used. I was thinking my company credit card rate might be demonstrable as an actual rate but if overdraft rates are published then that would also do
On the tax courses I have been on, the lecturers have been saying that credit card rate may be appropriate (though some advisors they spoke to were advocating store card rates!) - if hmrc queried it you would have to justify to them the rate you used. I was thinking my company credit card rate might be demonstrable as an actual rate but if overdraft rates are published then that would also do
Edited by oop north on Tuesday 19th July 08:27
Seems not.
From Government literature:
What counts as savings income
Savings income includes account interest from:
•bank and building society accounts
•accounts with providers like credit unions or National Savings and Investments
It also includes:
•interest distributions (but not dividend distributions) from authorised unit trusts, open-ended investment companies and investment trusts
•income from government or company bonds
•most types of purchased life annuity payments
Interest from Individual Savings Accounts (ISAs) doesn’t count towards your Personal Savings Allowance because it’s already tax-free.
From Government literature:
What counts as savings income
Savings income includes account interest from:
•bank and building society accounts
•accounts with providers like credit unions or National Savings and Investments
It also includes:
•interest distributions (but not dividend distributions) from authorised unit trusts, open-ended investment companies and investment trusts
•income from government or company bonds
•most types of purchased life annuity payments
Interest from Individual Savings Accounts (ISAs) doesn’t count towards your Personal Savings Allowance because it’s already tax-free.
Interest income of any sort is investment income.
In effect, when you have money on deposit with a bank or building society, you are lending that money to the bank - so the interest they pay you is the price they are paying you for access to that money.
It's no different to you lending money to any trading business - including a business you may actually own or control.
In effect, when you have money on deposit with a bank or building society, you are lending that money to the bank - so the interest they pay you is the price they are paying you for access to that money.
It's no different to you lending money to any trading business - including a business you may actually own or control.
Interesting recent article which agrees the £1000 can be used.
http://www.accountingweb.co.uk/tax/business-tax/pa...
Mind you CT61 process still seems to apply.
http://www.accountingweb.co.uk/tax/business-tax/pa...
Mind you CT61 process still seems to apply.
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