Dividends: A different angle.

[F C B P]

Ignoring the holistic situation, focussing purely on that of the individual.

Question: The most tax you can pay on a dividend is 25% (or 32.5% of the cash you've received grossed up by 10% notional tax, less the 10% notional tax)

In this scenario the individual is better off taking payments over £38,335 (ish) as dividend. (assuming bog standard allowance)

The question is, if you intend to make large payments into your pension scheme, (and you've paid no 40% tax) are you better taking the dividend as salary, to then claim the tax relief? (Obviously this would also allow you to pay more into the pension too)

Edited by F C B P on Sunday 4th June 20:09

[Eric Mc]

Up until 5 April 2006, you could only pay amounts into a pension scheme which you had reveived as Earned Income. Dividends are Investment Income and therefore could not be used to fund pension contributions.

However, one of the changes brought about by the recent "A" day pension regulation revisions is the fact that you no longer need to have any earnings in order to pay into a pension scheme.

The main thing you need to be aware of is whether you have to make any changes to your existing pension arangements to see if you can go down this route.

[F C B P]

I thought A day limited your pension payments (as an individual) to 100% of your earnings?

[Eric Mc]

To be honest, I'm not well read on the A Day provisions. You might be right - but you would need to check up on what they now consider as "Earnings" for pension contributions purposes.

The definition of earnings might have changed.

[F C B P]

Eric Mc said:

To be honest, I'm not well read on the A Day provisions. You might be right - but you would need to check up on what they now consider as "Earnings" for pension contributions purposes. The definition of earnings might have changed.

Fairly sure it's P60 plus P11d.

[Eric Mc]

Plus Self Employed income, if you have any.

But I thought that one of the key changes to the new rules was that Net Relevant Earnings was not such an isue?

[F C B P]

Eric Mc said:

Plus Self Employed income, if you have any. But I thought that one of the key changes to the new rules was that Net Relevant Earnings was not such an isue?

Less of an issue. Anything up to 100% of earning each year (up to the life time "pot" is usually more than enough!