Being paid in dividends

MrSausage

Hiya,

I've recently been given a payrise and the boss said that I could have the extra money as 'dividend payments' rather than as part of my normal PAYE salary because the tax is lower that way, however I would need to d the tax myself on a tax return. So now I get my original post-tax salary paid into my bank account and then an additional amount pre-tax as a separate payment.

I've never done a tax return before, or been paid anything other than normal PAYE so this is all a bit new to me. A friend mentioned yesterday that he was doing his tax return as the deadline was today, but as I understand it that only relates to April 2010 - April 2011, is that right? So I'd do my first one this time next year..?

Also how do I find out exactly how much I should be paying on these payments? I've tried Googling but am just getting very confused!

Thanks for reading,

MrSausage

BoGoF

Are you a shareholder/director of this company. If you are not then I would question the motives of this offer. I do not know if dividends can be paid to a non shareholder but paying you dividends also saves them money.

Today's deadline is for 2010-11 so if this payment is now then you won't have a Tax Return to do yet.

pjclar02

Indeed - you cannot pay dividends to someone unless they are a shareholder. Therefore, the company would need to issue you with some shares before you can be awarded dividends. I would ask for a share certificate to verify your shareholding.

If you are an employee in the company, then the award to you of shares would potentially give rise to a tax liability under the employment related securities legislation. Your employer would need to put some thought into how they structure this for tax efficiency.

If you are a basic rate taxpayer, you will not have to pay any tax on the dividend. If you are a higher rate taxpayer, you will pay tax at 25%.

BoGoF

pjclar02 wrote: »

If you are a higher rate taxpayer, you will pay tax at 25%.

Should that not be 22.5%......maybe I'm wrong....

corky2

BoGof - yep you're right.
Any income (dividends) you receive from your shares carries a 10% tax credit. No further tax due for BRT/non tax payers. Higher rate taxpayers have a total liability of 32.5% on dividend income and the tax credit reduces this to 22.5%, while the 50% additional rate taxpayers have a total liability of 42.5% reduced to 32.5% after tax credit is applied.

pjclar02

25% is the effective rate of tax on dividends.

A £100 net dividend would be grossed up for a 10% notional tax credit by multiplying by 100 and dividing by 90. Therefore gross dividend for recording on a tax return will be £111.11.

Tax is calculated at 32.5% of the gross figure = £36.11.

So £100 - £36.11 = £63.89. You then add back the notional 10% tax credit of £11.11 to get a dividend after tax of £63.89 + £11.11 = £75.

Quick and easy way to get to the same end result is to take 25% of the net dividend.

I'm guessing you got your 22.5% by taking the 10% tax credit from the 32.5% charge, which doesn't quite get you to the correct answer.

chrismac1

Shareholding paperwork - stock transfer form signed and dated by previous shareholder to certify you are now the shareholder is step one. Next is a share certificate signed and dated by a director and a "Registrar" - which is me in the companies I am the accountant of.

Finally each and every time a dividend is paid to you, you should get a dividend voucher which is your formal record for HMRC. Either that or - the option I do because it is easier - a consolidated tax voucher (which I do by tax year, as do Vodafone for example) showing clearly you, your holding, dates of payment, net dividend, tax credit.

If these are genuine shares and dividends you'll have seen all three of these documents by now.