Dividends

Blatchy

Hi, been reading this post with interest. I'm currently studying and have the following question I'm struggling with. If you could help I'd be really grateful:

The answer is £625 but I cant work out why!

Daniel has a total taxable income of £35,800 His dividend income within this amounts to £4,000. The total income tax liability on this dividend income is?

Thanks alot

Pumpkinface_2

slipp_digby wrote: »

I also invest a lot of time in helping people on this forum, the difference is I am prepared to be challenged when i offer advice.

So am I. And indeed I believe I did elaborate. But I would maintain there was no need to be aggressive and condescending and I don't think forums work best in this way, it is just off-putting. Now shall we move on.

trevormax

Blatchy wrote: »

Hi, been reading this post with interest. I'm currently studying and have the following question I'm struggling with. If you could help I'd be really grateful:

The answer is £625 but I cant work out why!

Daniel has a total taxable income of £35,800 His dividend income within this amounts to £4,000. The total income tax liability on this dividend income is?

Thanks alot

I've answered this for you in your thread mate

John_Pierpoint

slipp_digby wrote: »

why would being a shareholder in a company be 'like an employment contract'?

the poster already has a PAYE job at 40% tax and wants to become a SHAREHOLDER in a separate company.

being a shareholder is NOT an employment contract and you also dont neccessarily need to be employed by the company if you hold shares. shareholders can receive dividend income and if ALSO employed as directors can receive a salary (although they dont have to recevie remuneration).

the poster also says nothing which would infer that IR35 is involved. IR35 is simply to catch 'hidden' employees like IT contractors who work in a permanent job for one employer but set up a ltd to avoid income tax.

I think it is more to catch husband and wife teams.
As long as they both really do get stuck in to earn the money and/or run the company there should not be a problem.
Let me put this politically correctly "the trophy spouse" is under attack.

Personally I think if both of them know the rules such teams should be encouraged, for the good of the nation, not tangled up in red tape.

http://petitions.number10.gov.uk/STOP-IR35
http://petitions.number10.gov.uk/DropIR35

Nazitf

Hi all,

I'm new to this dividends game so please be gentle! For higher rate tax payers, doesn't the entire above discussion omit the fact that 21% CT has to be paid on all company profits. Therefore for higher rate tax payers who create their own limited company, pay themselves a £6475 salary, and take the remainder in dividends, wont they be worse off than paying all the company profits as their salary?

For example:
£6,475 salary (no tax, minimal NI)
£40,000 dividends (CT at 21%, then taxed again at 25% on the amount that takes them into the higher rate tax payer band)

Or:
£46,475 salary (taxed at 20% for BR tax band and then 40% for HR tax band, 11% NI + 1% NI on salary in upper limit)

MrCarrot

Perhaps it's worth mentioning that dividends come out of pre-taxed company profits (corporation tax being 21% I think for small businesses at the moment).

So I think the tax saving mainly comes in not paying NI.

However I think you could pay yourself a wage slightly higher than your tax allowance and pay a very small NI contribution to fund your state pension.

Nazitf

MrCarrot wrote: »

So I think the tax saving mainly comes in not paying NI.

Yes but if you are a higher rate tax payer, according to my calculations, it is actually worse off to pay dividends instead of a salary. Anyone agree?

Nazitf

MrCarrot wrote: »

Perhaps it's worth mentioning that dividends come out of pre-taxed company profits (corporation tax being 21% I think for small businesses at the moment).

So does this mean that the dividends paid do not attract a corporation tax?

Elaine_Wilson

Nazitf wrote: »

Hi all,

I'm new to this dividends game so please be gentle! For higher rate tax payers, doesn't the entire above discussion omit the fact that 21% CT has to be paid on all company profits. Therefore for higher rate tax payers who create their own limited company, pay themselves a £6475 salary, and take the remainder in dividends, wont they be worse off than paying all the company profits as their salary?

For example:
£6,475 salary (no tax, minimal NI)
£40,000 dividends (CT at 21%, then taxed again at 25% on the amount that takes them into the higher rate tax payer band)

Or:
£46,475 salary (taxed at 20% for BR tax band and then 40% for HR tax band, 11% NI + 1% NI on salary in upper limit)

I think you're forgetting the employer's NIC.

Also many discussions on this subject ignore the fact that dividends have to be paid out of taxed profit so it is misleading just to compare percentages. Having said that, the main savings are on the income which falls within the basic rate band. As an example let's assuma a company makes a profit of £50,000.

All salary:

The maximum salary payable is £44,326 since employer's NIC is payable. The tax on this totals £7,660 as it just goes into the higher rate bracket. Employee's NIC is £4,202 so the net pay is £32,464.

Small salary and dividend.

The salary of £6,475 attracts a NIC liability of £83 but no tax. The taxable profit of the company is £43,525 (£50,000 - 6,475) so corporation tax at 21% = £9,140. The distributable profit is therefore £34,385.

This is equivalent to a gross dividend of £38,206 which will attract higher rate tax of £181. The net "pay" is therefore 6,475 + 34,385 - 83 - 181 = £40,596.

Quite a significant difference.

Those figures just put the individual into higher rates. Each £10,000 extra earned by the company could be distributed similarly to give the following net figures -

As salary - net of £5,321.

As dividend - net of £5,706.

So dividends still win.

MrCarrot

Nazitf wrote: »

So does this mean that the dividends paid do not attract a corporation tax?

Sorry, perhaps I used the term "pre-taxed" incorrectly. What I meant is, dividends come out of company money that has ALREADY been taxed (at 21%).