Just checking my dividend understanding

[DSLiverpool]

I think I’m right but thought best to open myself up to ridicule here.

I’ve done the pension drawdown a few years ago and took the 25%

I’d like to start taking lumps out until it’s zero - I know this is taxed as per income bands

Question - I pay myself by dividends from 2 LTD companies keeping under 8.75%

And one pays me £750 a month to use free allowance.

Will taking the pension money have any bearing on the dividend rate - are they separate?

I don’t want to pay more tax than I have to.

Cheers

[WayOutWest]

Explained here: https://www.gov.uk/tax-on-dividends

As you say, your Pension Income is taxed at normal income tax rates. And it could push you into the higher rate tax band if your total income from pension and dividends combined exceeds £50,271, which then means dividends will be taxed at the higher rate of 33.75%.

I guess it depends how much headroom you have above your current total income from dividends.

Also note that the Divided Allowance is dropping to a pathetic £500 for tax year 2024/25 - so their example that uses a Dividend Allowance of £2000 is already out of date.

[isleofthorns]

am sure one of the accountants on here will correct if wrong, but my understanding is that the income taken from the pension will be taxed first at normal income tax rates. the dividend will be taxed after this (net of the allowance) at the marginal rate for dividends.

In practice, this means you'll probably end up losing some or all of the benefits of the lower dividend rate, as you'll be using up your lower rate tax band with the pension income first (at 20% rather than 8.75%).