dividend tax and personal allowance

jbox

Hi MSE,

I often hear of self-employed workers paying themselves the tax-free allowance and drawing the rest of their income as dividends. From my understanding of the loss of personal allowance for incomes over £100,000 - this is based on total income including dividends, and so if your dividend income exceeds £100,000, you are better off not taking a salary at all. Is this correct or have I misinterpreted something?

Also - based on the above scenario, if you were paying into a SIPP, would your effective tax relief be 40% or 32.5%?

Thanks!

J

TrickyDicky101

There can be reasons why you may want to take a salary (even at minimum level) eg to maintain your NIC contributions for eventual state pension receipt.

greyteam1959

TrickyDicky101 is correct.........

chalkie99

Self employed workers are taxed on their profits, not whatever they may draw as "wages".

Dividends relate to shareholders of limited companies.

If you have a ltd company then you would probably pay yourself a notional wage somewhere under the tax free allowance but high enough to qualify for national insurance benefits ( without actually having to pay the NI).

Your Ltd co then pays Corporation Tax on it's profits (currently 20% for small businesses) and you can, effectively, be paid a dividend which is tax free from the net (tax paid) profit of the ltd company, thereby avoiding NI on that income. This applies up to the higher rate tax allowance at which point you pay, effectively, a 10% tax on the excess dividend.

If you are self employed and not a ltd company this does not apply.

jbox

Yes sorry I meant if you are a shareholder of a limited company. If the dividends were in excess of £100,000 do you still lose your tax free allowance (£1 for every £2 above)? Good point about national insurance, I hadn't considered that. Thanks for the responses.

TrickyDicky101

chalkie99 wrote: »

Your Ltd co then pays Corporation Tax on it's profits (currently 20% for small businesses) and you can, effectively, be paid a dividend which is tax free from the net (tax paid) profit of the ltd company, thereby avoiding NI on that income. This applies up to the higher rate tax allowance at which point you pay, effectively, a 10% tax on the excess dividend.

It's been a while since I did any personal tax but I'm pretty sure the marginal rate of tax for 40% rate taxpayers on dividends continues to be 25% of the net dividend (ignoring any other social engineering policy crap like withdrawal of PA)

taxing

jbox wrote: »

Yes sorry I meant if you are a shareholder of a limited company. If the dividends were in excess of £100,000 do you still lose your tax free allowance (£1 for every £2 above)? Good point about national insurance, I hadn't considered that. Thanks for the responses.

The short answer to your original question is Yes, it does count as the level is on total income in the year and from all sources.

The didvidends from a company come out with a 10% tax credit attached: it is the net amount you get in your hand PLUS that 10% which is added to your other gross (before tax) income. So you take a dividend of £90,000 say , the tax credit is 1/9th of this so £10,000; so gross dividend for tax is £100,000.

Regards