Higher rate tax on dividends

missmoon

Companies perspective:
For the company to pay a dividend to you, the company must have enough reserves to do this (i.e. profit).

The companies corporation tax is based on it's profits, not the dividends paid out of it. This is because the profits used are BEFORE the deduction of the dividend paid. So the payment of a dividend will not affect the corporation tax of the company.

The dividend paid is the "net" amount.
The gross dividend = net dividend + 10% notional tax credit

Taxpayers perspective:
If the taxpayer is a basic rate tax payer, no additional tax will be due.
This is because the tax due on the gross dividend [the net receipt + 10% notional credit (10/90)] is charged to tax at 10% and therefore is covered by the 10% notional tax credit.

If the taxpayer is a higher rate tax payer tax is due at 32.5% of the gross dividend less the 10% notional tax credit. This equals 25% of the net dividend received.

If you have some basic rate band left, this amount of the gross dividend will not attract additional income tax, but the remainder will.

To be a higher rate taxpayer your earnings in excess of the personal allowance of £5,225 exceed the basic rate threshold of 34,600 plus any basic rate extension.

The basic rate band extension applies where:

• you have made gift aid donations
• you have paid into a personal pension

The gross amount of these payments are used to increase the basic rate band and therefore extending the amount of dividend taxed at 10%.
The gross amount is found by multiplying the payment made by 100/78.

However:

The company could pay your pension for you. Perhaps instead of paying you a dividend (or as well as depending on profits). This would be an allowable deduction from the companies profits and therefore reduce the corporation tax. The company will need to set up a pension scheme for its staff and deduct the amount from the salary before the tax is calculated, you are therefore getting basic rate tax relief at source, so it reduces the amount your salary is charged to PAYE & NIC.

Please discuss this further with your accountant.