Dividends

fattony

Hi all

I have a ltd company registered but its not trading, I've been looking into doing a budget and part of this is wages / dividends and could do with a couple of pointers.

firstly any wages / dividends will total around £30k

Am I right in saying that the dividend will be taxed at 10%?
Could I pay myself £10k salary and £20k in dividends to pay less tax or is there rules against this.

Im going to meet an accountant in a few weeks I just wanted to set out a budget cost.

Thanks

trevormax

The dividends will not be taxed unless you go into the higher rate tax band but it's a little more complicated than that.

First of all, the company needs to be making enough profit to be able to pay you dividends. No profit = no dividends.

Second (this is where it gets a bit complicated), any dividends you pay yourself will be net of the dividend 10% BR tax. So ignoring the personal allowance, if you pay your self £9,000 in dividends, this is the net amount and a tax credit will be added on top of this meaning the gross amount is actually £10,000. You dont ACTUALLY get £10,000 but in the eyes of HMRC, this is the amount you have received. Also, you don't actually pay any tax on dividends when in the basic rate band, the company doesn't pay tax when paying you this either as it is from the companies profit, so it will have already paid tax for it. You need to remember this for part 3.

Part 3, What most people will do is pay themselves a wage which is the same as the personal allowance for that year (so £6,475 for 09/10), and then pay themselves dividends up to the start of the higher rate band making sure that they ad the 10% tax credit onto the dividend and not go over the the threshold. By doing this, they are basically getting an amount tax free. For 2009/10 the amounts would be:

Gross amount paid
Wages £6,475
Gross Dividends £37,400

The actual amount paid would be:
wages £6,475
Net Dividends £33,660

So you would get £40,135 tax free and perfectly legal. This also saves the company money on paying NIC for you too but could affect your state pension.

Something else people sometimes do is called income shifting which wont be around for long if HMRC get their way. Very simply, the director will employ their husband/wife and transfer 50% of the company shares to them. There is no CGT to pay on transfer of these shares as transfers of shares or property to a husband/wife can be made free of CGT.

Then they simply repeat the wages and dividends for each of them doubling the amount of tax free income.

It is def a good idea to see a good tax consultant or at the very least, an accountant who knows a thing or two about taxes to sort this all out and ensure it is done propperly.

Pumpkinface_2

Wasn't this loophole closed a fair few years ago? As so many people particularly IT contractors were paying themselves incredibly low wages and then getting away with taking the rest out as dividends.

I actually really could not follow the post above properly, but in theory, I understood that the practice I described above was no longer allowed.

Any

From Direct Gov website:

Dividend tax rates 2009-2010

There are two different Income Tax rates on UK dividends. The rate you pay depends on whether your overall taxable income (after allowances) falls within or above the basic rate Income Tax limit.
The basic rate Income Tax limit is £37,400 for the 2009-2010 tax year.


Dividend income in relation to the basic rate tax band
Tax rate applied after deduction of personal allowance and any blind person's allowance
Dividend income at or below the £37,400 basic rate tax limit 10% - the dividend ordinary rate
Dividend income above the £37,400 basic rate tax limit 32.5% - the dividend upper rate

It doesn't matter whether you get dividends from a company, unit trusts or open-ended investment companies, as all dividends are taxed the same way.


So now I am confused myself. Never yet had the chance to deal with dividends. Very interesting topic.

Pumpkinface_2

OK, had a read around, the legislation I was thinking of is known as IR35. The OP needs to look into this, with the information provided it is impossible to say whether they would be caught by IR35 without knowing the nature of their business.

If they were then this low salary / dividend option will not work as any income caught by IR35 must be paid as salary.

fattony

Thanks for the advice, Im pretty sure the company would make a profit, it's an electrical contractor so not an online business or buying and selling.

Could you just confirm I understood this correctly:

Wages - £6475
Dividends - £21,000

Net wages / dividends Yearly - £25,375
Net wages / dividends Monthly - £2,114

Also how often can you take a dividend?

trevormax

fattony wrote: »

Could you just confirm I understood this correctly:

Wages - £6475
Dividends Gross- £21,000

Net wages / dividends Yearly - £25,375
Net wages / dividends Monthly - £2,114

Also how often can you take a dividend?

Correct. So you would be paying yourself £540 wages and getting £1,575 net dividends each month.

When I worked in an accountancy, people would often just split the dividends up to take something each month but would normally write up something saying it has been agreed to pay £xxx per share to each person in tax year 09/10, and keep this on file. If the accountant you see knows their stuff, then they will go through all of this with you and suggest the best course of action.

fattony

Ok great, just trying to work out how much our costs will be so we can work out how much to charge, but will run this past an accountant

slipp_digby

trevormax has given you some very good advice on tax efficency.

where people can take a degree risk with a small business i.e. the risk of making a profit the above is the position to be in.

the process of issuing dividends was covered on some of my posts a couple of days ago i.e. about legality, distributable profit etc. if you are looking for a monthly dividend you will need to keep accurate books to ensure everything is above board and show the dividend income etc.

TuftyMatt

As an employed 40% tax payer I may have the chance to take a shareholding in a newly formed company and make extra income from the service I offer.

As you can imagine I do not wish to pay 40% tax on any extra income (if possible.) and was thinking about taking dividend payments.

Is this possible or is there another way of paying myself without giving so much to AD?

Any

I believe that as you already are in 40% bracket your dividends would be taxed on 32.5% as that is what is the higher rate for dividends...

But I don't have huge experience in this, so let's wait for someone to confirm it.