Dividend tax question

CTA_2

@Mary Hartnell

Mathmatical calcs all correct. IF the entire divi is taxed at the dividend higher rate (32.5%) then the effective rate of tax is 25% on the individual.

This is economic double taxation rather than legal double taxation. In law, the profits of the company and the dividend of the shareholder are two seperate assets. Economically of course, they are all the same "pot" and that has historically been the argument as to why this double taxation exists. The 10% notional (repeat notional, this tax credit is not repayable as you point out) is merely a relief to alleviate the effects, partially, of the double taxation.

Many would argue that IHT is the worst form of double taxation, but as the lay person tends not to be affected by it nobody makes a concerted effort to remove this.

grey_gym_sock

yes, 43% is correct for the total tax on company profits paid as dividends to a higher rate tax payer.

however, profits which are retained in the company are only taxed at 24%.

and dividends are more lightly taxed than salaries: if that 2631.58 of pre-tax profits was instead used to increase the salary of a higher rate tax payer, then to cover employer NI at 13.8%, the salary would only go up by 2631.58/1.138 = 2312.46, which would be taxed at 42% (40% income tax + 2% employee NI), leaving 2312.46 * 0.58 = 1341.23 for the employee. i.e. less than the 1500 left from dividends. the effective tax rate is c. 49% for the employee.

Mary_Hartnell

Many thanks for the above - at last I do understand how it works.

At he back of my mind, I seem to have a memory that once upon a time the tax payer could decide the order of the slices of income that made up the grand total?

Is this some sort of folk memory dating back to the virtually disappeared 10% tax band?

As a grandmother, at least I don't have to understand family/child tax credit.

grey_gym_sock

i don't think you could ever choose ...

dividends are the top slice or income, with interest below dividends, and everything else below that.