Basic Tax Question

skyjumper

I have a tax Question which I tried looking around in the forum with not much luck. this may look like a bit silly question but I would like to know if someone is making £36500 p.a, how would the tax be calculated

• The first £2,230 of income is taxed at 10%.

Income from £2,231 to £34,600 (in other words the next £32,370 of income)

• Usually taxed at 22%, but special rules apply to savings income
• Dividend income is taxed at 10%
• Other savings income is taxed at 20%

Higher rate band: Income over £34,600

• Is usually taxed at 40%
• But dividend income is taxed at 32.5%

is this info right? what about if you are self employed under a Ltd Company and is taking a combination of Dividend and Salary. What would be a good combination - eg; if you take out around 6000p.a as a Salary, how much you could take out as Dividend- so as to safely stay within the lower threshold. is 28600 (34600-6000) a good figure . Am I missing something here?

thanks in advance

System

If you are talking about the current tax year then assuming you are under 65 years of age the first £6035 of the £36500 would be tax free leaving £30465 taxable at 20%.

This link might be helpful - http://www.hmrc.gov.uk/rates/it.htm

and this one is extremely useful for anyone starting a business -

http://www.businesslink.gov.uk/bdotg/action/layer?topicId=1073858805&furlname=startingup&furlparam=startingup&ref=http%3A//www.hmrc.gov.uk/startingup/&domain=www.businesslink.gov.uk

skyjumper

thanks Pam17

trevormax

the numbers you have shown are from the 07-08 tax year. You are nearly correct, however you have left out the tax free personal allowance.

In 07-08 income of £36,500 would be taxed thus:
£36,500 less PA 5225 = 31,275 taxable.
Lower rate 2,230 @10% = 223
Basic rate 29045 @ 22% = 6389.9
Nothing at higher rate.

Total tax due = 6612.9

If you are talking about the 08-09 tax year, it would be taxed thus:

£36,500 less PA 6035 = 30465

No lower rate unless it is savings income only.
Basic rate 30465 @ 20% = 6093
Nothing at higher rate.

Tax due 6093

For dividends, as long as your company is making enough profit to cover the amount of dividends you are receiving you should pay £6035 as salary to use your personal allowance (as long as there is nothing to increase or reduce the allowance).

Then you will have to take £31,320 as net dividends. When taking dividends they will be paid to you net of 10% tax. You need to gross up the net amount and then add it to the salary to see if you are going into higher rate. 10% of 34,800 is 3,480. 34,800 - 3,480 = 31,320

skyjumper

Many thanks trevormax,

any thoughts on this?

what about if you are self employed under a Ltd Company and is taking a combination of Dividend and Salary. What would be a good combination - eg; if you take out around 6000p.a as a Salary, how much you could take out as Dividend- so as to safely stay within the lower threshold. is 28600 (34600-6000) a good figure

thanks again

trevormax

it would be salary £6,035 and net dividends £31,320. This would keep you below the higher rate threshold. If you pay more salary or dividends, you will be liable to tax at higher rate.

skyjumper

trevormax, thanks for the reply.

i'm not trying to pick your brians but could you please tell me where you got these figures £37355 ( 6035 plus 31320)

My understanding was that - it's 34800 plus 6035 = 40835 before the Higher tax rates kick in ?

ossie

UK PAYE Income Tax Calculator

www.listentotaxman.com

has a free UK PAYE Income Tax Calculator for 2008/09 and previous years too.

jem16

skyjumper wrote: »

trevormax, thanks for the reply.

i'm not trying to pick your brians but could you please tell me where you got these figures £37355 ( 6035 plus 31320)

The £31,320 is the net dividends which grossed up to include the tax credit of 10% is £34,800.

My understanding was that - it's 34800 plus 6035 = 40835 before the Higher tax rates kick in ?

That's correct.

skyjumper

thanks Ossie and jem16

that makes sense. sorry for the ignorance

Bluebirdnick

skyjumper wrote: »

Many thanks trevormax,

any thoughts on this?

what about if you are self employed under a Ltd Company and is taking a combination of Dividend and Salary. What would be a good combination - eg; if you take out around 6000p.a as a Salary, how much you could take out as Dividend- so as to safely stay within the lower threshold. is 28600 (34600-6000) a good figure

thanks again

Hi,

Sorry to interrupt, but it depends on what that Ltd company does, and with whom it contracts. if you've not already done so, I'd suggest you read IR35: http://www.hmrc.gov.uk/ir35/

Apologies if you've already done this!

Nick