Tax and company dividends

[Deleted User]

Started off the year as an employee of someone else. Now I'm director of my own limited company.

This tax year earned £14587 taxable pay (it was PILON as well), and paid £3715 in tax and £513 in NI.

Accountant has advised me to pay dividends to myself as company director rather than salary. I understand dividends are grossed up and you get a tax credit with it.

How does this work? Am I right in saying that (assuming personal income stays under upper limit) the dividends consider tax to be paid?

What I dont understand is that if dividend tax credit is 10% how does that cover tax for that dividend (since personal tax is 20%)?

So at the end of the year is my tax return going to say, the income above, plus the dividends which are tax already paid?

Its just it looks like maybe I've paid too much tax already? Can I reclaim this or have to wait until tax return time?

noh

Tax on UK dividends for a basic rate tax payer is 10%.
That 10% tax due is satisfied by a notional 10% tax credit attached to the dividend.
Therefore for a basic rate tax payer there is no further tax to pay.

http://www.hmrc.gov.uk/taxon/uk.htm

Looks like you have paid too much tax on your income this year.
I think you will have to wait till you submit a return to get a refund.

chalkie99

re. the tax credit reference to dividends - don't forget that the dividends are paid from the after tax profits of the Company so 20% tax will already have been paid via the Company accounts.

You only pay extra tax on dividends which push you over the higher rate tax bracket on total earnings.

[Deleted User]

Yes, just found out its 10% tax on dividends. So if I've paid too much tax do I really have to wait until Jan 2013 (when tax return for year end April 2012 is due)?

TrickyDicky101

In practical terms, there is a 0% marginal rate of tax on dividend income if you are a basic rate (or less) tax payer. If you are a higher (40%) tax payer, you have a marginal rate of 25% of the dividend received. Worrying about notional credits or whether rates on gross dividends are 10%/32% is irrelevant. Just worry about the marginal rate.

[Deleted User]

So is there any way to get the tax back before SA submission?

http://www.direct.gov.uk/en/MoneyTaxAndBenefits/Taxes/BeginnersGuideToTax/IncomeTax/Taxrefundsreclaimingtax/DG_078358

I;'ve seen this but this seems to be more relevant to people out of work, retired, back to college etc.

jimmo

Yes there is. Your own limited company is now your employer for tax purposes and, like any other person moving jobs, you were required to hand in your P45 to your new employer.
Then, even though you are not earning any wages, your employer should operate PAYE normally and, each payday, your employer should refund to you the tax you have overpaid according to the tax tables used by employers.
However if you are the sole owner (shareholder) and sole employee of the limited company the administrative cost of correctly operating PAYE could be prohibitive.

[Deleted User]

jimmo wrote: »

Yes there is. Your own limited company is now your employer for tax purposes and, like any other person moving jobs, you were required to hand in your P45 to your new employer.
Then, even though you are not earning any wages, your employer should operate PAYE normally and, each payday, your employer should refund to you the tax you have overpaid according to the tax tables used by employers.
However if you are the sole owner (shareholder) and sole employee of the limited company the administrative cost of correctly operating PAYE could be prohibitive.

Yes, I'm just setting up PAYE. I dont actually pay myself a salary this year (already used up allowances etc)

Someone suggested paying myself a nominal sum and then getting a refund off HMRC this way -

http://www.hmrc.gov.uk/employers/payefunding.htm

lordbase

Another point to add is that you don't have to wait until January 2013 to submit your tax return, you can prepare it and submit it (assuming you have all the information) as soon as the tax year finishes in April next year.

If you have overpaid tax HMRC will refund it as soon as they have your return.

FatAndy

jimmo wrote: »

However if you are the sole owner (shareholder) and sole employee of the limited company the administrative cost of correctly operating PAYE could be prohibitive.

I'm not sure the cost of correctly operating PAYE should be at all prohibitive. There's a free PAYE tax calculator on the HMRC website - http://payecalculator.hmrc.gov.uk/PAYE0.aspx - as well as an NIC calculator - http://payecalculator.hmrc.gov.uk/PAYE0.aspx. You can set up a simple spreadsheet to record the numbers.

n.b. There are special rules for calculating NICs for company directors but if you pay yourself a notional salary (i.e. below the PAYE/NIC threshold) these rules become irrelevant.

http://www.hmrc.gov.uk/nitables/ca44.pdf