Tax free dividends from own company,how is it done?

Watchet

You know the thing where, if you've your own ltd company and pay yourself salary just below the threshold for tax and nic's, then pay yourself dividends. How are they tax free ? How do you report them to hmrc (what section?) basically how do you report them correctly but not have to pay tax on them. I know it's possible as friends have told me that's how they operate and it's kosher per their accountant.

I've started a small business and would like to deal with my earnings the same way, however I don't have the money for an accountant (not yet anyway). I don't intend doing anything improper re tax, would just like someone to explain how I report any such dividend payments to myself, if they have a special name or place in the Return. Many thanks.

Rolo_Tomasi

Dividends paid are included on your personal tax return in the dividends received box (on the same page as interest from banks). They are not tax free but have a tax credit of 10% attached to them. This tax credit is not repayable if you are not a tax payer however there is no further tax due if you are a basic rate taxpayer. If you are a higher rate taxpayer then there is additional tax due.

Don't forget that companies pay Corporation Tax (at 21%) on their profits before dividends have been paid.

Watchet

Thanks Rolo Tomasi

Do I have to gross them up for the Return? Say I pay myself £350 per month so £4200 in the tax year, do I have to show
£4620 gross......................£420 tax...................£4200 net
in the dividend section ?
And as long as the basic salary I pay myself (£400 per month) plus dividend (£350 per month) so total £9000 stays under the 40% threshold, that's it?

Many thanks again

Rolo_Tomasi

Yes....and.....no....
Your income for tax purposes includes the gross dividend so in your example your income for tax purposes would be £9420 however you only put the net dividends on the Return - the tax calculation automatically grosses it up.

Watchet

Ok, I put the net in and the system grosses it up. And when it calculates the tax due, it somehow knows I've paid £420 (deducted from divs).

Phew, got it now. Thanks again.