Calculating tax on dividends

grifferz

Hello,

I'm not entirely sure if this is the correct forum but it's about dividends so I think there will be many here who understand this.

I'm trying to understand how dividends are taxed.

I've not yet paid myself a dividend, but most likely will in 2011. My accountant will sort it out for me, but I do like understanding how things work. I don't really want to bother the accountant with what I think is a simple question though, so I hope you will indulge me.

There's an example of working out tax on dividend income on ir35calc.co.uk but I can't post a link to it because I'm a new forum user.

In the example the person has a gross salary of £6k and pays themself a net dividend of £60k. I understand how that is grossed up to £66,667, £6k salary added to arrive at £72,667. The personal allowance of £6475 deducted from that to result in a taxable dividend income of £66,192.

I follow that the first £37,400 is taxed at 10% but the 10% tax credit leads to no tax there. Then the remaining £28,792 is taxed at 22.5% to result in tax of £6,478.

What I do not understand is, what happens if instead of a £6k gross salary (which does not attract income tax due to being within personal allowance), there is a gross salary more like £10k? The individual would have already paid income tax via PAYE on some of that. Is the £10k really added to the £66,667 dividend income to get taxed again at 22.5%?

I think I am missing something obvious, yet a lot of searching has not enlightened me, so I hope someone else can.

Thanks!
Andy

Gertie_Walker

If the salary is higher you include the whole salary as you have stated and the dividends are charged at the higher rate with credit given for the dividend tax as well as the PAYE tax. Always look at your income as a whole, dont separate out each chunk.

grifferz

Hi Gertie, thanks for your reply. I think I understand now. I was getting confused because I didn't appreciate that tax paid through PAYE is just a prepayment against the final tax bill.

So just to check I really do understand, given the example of someone whose gross salary is £10k.. They will have paid income tax on £10k-£6,475 = £3,525 at 20% = £705.

Then when it comes to deal with the tax for the £60k dividend, that is grossed up to £66,667, the £10k added, £6,475 deducted = £70,192. There's no tax on the first £34,700. The remaining £35,492 has 22.5% = £7985.70. £705 has already been paid through PAYE, so an additional tax payment of £7,280.70 would be due.

Do I have that right?

Cheers,
Andy

Edit: I did of course mean 37,400 above, not 34,700, so the sums are wrong but hopefully I was going in the right direction.