Corporation Tax Vs. Dividend payments

robert_harper_2000

I'm so confused! lol

What is the relationship between corporation tax and a dividend payment?

Corporation Tax is the tax on your companys net profits and a dividend is paid before or after the corporation tax?

Coporation Tax is 21%
Dividend is 10% ? and sth about a tax credit?

I am just trying to figure out how I am getting tax.

Cheers

robert_harper_2000

I think you pay corporation tax at 21% (assuming profits less than 300k) then dividends are paid post CT but are topped up with a 10% tax credit?

morgani

Corporation Tax is indeed currently at 21% for profits up to £300k.

Dividends are paid after tax out of the retained earnings of the company.

Retained earnings b/fwd + current year post tax profits = retained earnings.
Retained earnings - dividend [aid = retained earnings c/fwd

The dividend paid will be the net value (i.e. the 90% amount) They carry a 10% tax credit due to this. i.e. if you pay a dividend of £9k this will effectively be a dividend of £10k with a tax credit of £1k. As long as you remain a basic rate tax payer then there will be no further tax to pay.

robert_harper_2000

I appreciate your reply, does help.
Just trying to work out my question lol

robert_harper_2000

OK, so are dividends paid post corporation tax post 21% Tax ?

Is corporation Tax charged on Sales - costs - expenses = x

robert_harper_2000

Or I think if someone would explain what the cost is of paying a dividend.

You pay 21% coporation tax then pay the dividend - so that would have cost 21% but what is this about a tax credit 10% ?

MrCarrot

Dividends are paid from company profits AFTER tax.

So:

Total Sales - Total Costs = Gross Profit.

Gross Profit - Tax (21%) = Net Profit.

Any dividends you are paid come out of the company's Net Profit.

As someone mentioned above, they carry a 10% tax credit. So if you paid yourself £10k, then £9k of it would be considered the actual dividend with the £1k part being the tax credit. The tax credit part means the money has effectively been taxed at less than 21%

robert_harper_2000

So are the div charged at 10% and at the same time tax credited with 10% so no tax is due?

James_Trimby

HI

since this all changed some years ago (a Gordon Brown'ism) I've spent many hours of clients monies trying to explain these credits/tax charges etc...!

The company makes profits (Sales less Cost of Sales less Expenses). These are taxed at 21 % (this year). These remaining profits then go into the company's reserves.

If the company wishes it may pay a dividend out of these reserves. AS FAR AS THE COMPANY IS CONCERNED no further tax is payable. BUT to "assist" the recepient a dividend voucher is given out with the 10% tax credit added. (in the past this rate was = to or similar to the corporation tax rate so made sense, now it is deemed tax credit and bares no relationship to the company's tax bill)

The end result is if you are taking monies out of your own company, and you remain a basic rate tax payer the total tax charge is 21% - paid by the company. If you are a higher rate tax payer the overall tax bill is 40.75% part paid by the company and part by the shareholder. STILL alot cheaper than paying National Insurance on wages!

For the individual if you receive £9000 cash you will also receive a notional tax credit of £1000. When looking at total income one adds the £10,000 to the figures. BUT if a basic rate tax payer (20%) one does not have to pay any extra tax (the 10% notional tax credit is allowed to cover it) BUT if you are a higher rate tax payer (40%) you will have more to pay BUT at a rate of 32.5% on the £10,000 being £3250. LESS the notional tax credit of £1000 EXTRA TO PAY £2250 (short cut to this is 25% of net dividend which is how it always was before Gordon got his hands on it!)

The reason it was done like that was to reduce the repayments of tax having to be made to pension funds/charities/ISA's etc etc Now most can't get any monies back now anyway, but the rules still remain. BUT he did not want to change the effect on individuals so we now have this funny higher rate on dividends and a odd notional tax credit. If you understand this you are a better man than most!

regards
James