Salary and dividend tax rate

zygurat789

asdute wrote: »

well i done my research and I was sure it is 10% on dividends I know corporation tax is 20%. But when i called his accountant she said "I don't know where you get this 10% it is 20%". He can take money out when he wants and at the end of the year we will figure out which way is the best for him tax wise"

I don't think HMRC will like this (taking money out of the business account when you feel like)
I am AAT student myself (haven't done business tax yet) but things like she said I find unacceptable.
Can you advise how much accountants(not cowboys) charge for limited company
thanks

That's what you pay your accountant for, tax advice to legally minimise your liability.
I think you and your husbands accountant are talking at cross purposes,
there is no 10% rate for companies, the only tax a comapny pays is corporation tax on its net profit at 20% for a small company. The 10% is an Income tax rate on the individual who receives a dividend.

sunshinetours

I would imagine there is a communication issue rather than your accountant thinking dividends themselves are taxed at 20%.

As mentioned the company will pay corp tax at 20% on all profits before dividends are taken.

If his overall personal income is under the current 40% taxable threshold, then he will probably not pay any personal tax on those figures you have posted, which I am sure is why they have been suggested.

Lots of other caveats and such with limited companies and also within CIS industry so I would also agree you need and accountant who understands and can explain things so you can understand

Some of this you will cover I am sure in due course in your AAT studies but I would get it right to start

00ec25

clearly there is miscommunication when you talk to the accountant

the company pays 20% corporation tax. Dividends may be declared and paid by the company as many times as it wants during the year - in fact it is normal for companies where there is a sole director/owner to declare a monthly dividend so that the person has a regular income stream coming into their personal bank account throughout the year. This is very basic stuff for an accountant

the role of the accountant is to ensure that by year end any such "interim" dividends are properly accounted for as a distribution made from the post corporation tax profits. The accountant will then advise on how much post tax profit has not yet been distributed and therefore how much is available for a "final" dividend payment

the company does not pay tax on the dividends because the dividend is simply a slice of the post corporation tax profits so the company has already paid tax at 20%

now when your husband receives the dividend then, like any other income (eg his wages), he is liable for tax on this personal source of income .
But, if his total income including the dividend remains below the higher rate tax threshold then he will not have to pay any tax on his dividends as they come with a notional tax credit at the rate of 10%.

But, if he is above the higher rate threshold then he will have to pay extra tax on the dividend - technically this rate is 32.5% but in reality it equates to 25% of the cash actually received as the cash he received is already net of the 10% notional tax . Easier to explain with numbers, the concept is called "grossing up"
1. say he receives £100 cash in his bank as a dividend payment
2. that £100 is net of the 10% notional tax so the gross value of the dividend is £100*100/90 = £111.11. So for the purposes of his total income he would add his gross wages pay to his gross dividends and see if he breaches the higher rate threshold
3. if he does then the dividend tax rate is 32.5% so 111.11 x 32.5% = £36.11 but there is already a 10% tax credit netted off against the £100 cash he got
so 10% of 111.11 is 11.11
4. therefore as a higher rate tax payer he would need to pay tax of 36.11 - 11.11 = £25
5. mathematically therefore you can see that the extra tax payable by a higher rate tax payer on a dividend is 25% of the cash received

so for tax planning purposes...
if he is a sole trader not operating via a company he will simply pay 20% income tax on his net profit (and 40% if goes above the higher rate threshold)

however, if he is the owner of the company (which, for example, was set up to provide protection so he no longer had personal liability for his work) then the company pays 20% corporation tax on the net profits and he as a private individual will receive dividend income where either no further tax is due because his total income (wages = + dividend) is below the HR threshold OR because he is above the threshold he will only be liable for tax at 32.5% rather than 40% on the dividends this giving him a tax saving of 7.5% for using dividends via a company rather than 40% flat rate as a sole trader.

The accountant should also be advising him to actually take a wage and not rely wholly on dividends because he must draw enough wages to get his full national insurance record credit to build up his state pension entitlement

having read the posts from accountants who work in this field then the fess for a simple Ltd company like that are going to be around £700 - £1,000 pa ( https://forums.moneysavingexpert.com/discussion/comment/64465646#Comment_64465646 )

Johnandabby

asdute wrote: »

But when i called his accountant she said "I don't know where you get this 10% it is 20%". He can take money out when he wants and at the end of the year we will figure out which way is the best for him tax wise"

Not overly helpful advice, without fully understanding any tax liability... I have to admit that I spent a long time searching online before I understood dividends, as my first accountant wasn't any good at explaining.

If you take out too much dividend, you pay 25% of the surplus as tax - so could be a big tax bill if you aren't careful. Dividends can be deferred to delay tax payments, but still have to be paid. The very least I would expect is for your accountant to give you a maximum dividend amount for the year (personal tax free), with a request to call them if you need to take out more.

I have used this calculator https://www.nixonwilliams.com/dividend_calculator.asp to give myself an idea of tax liabilities on increased dividends.

getmore4less

this giving him a tax saving of 7.5% for using dividends via a company rather than 40% flat rate as a sole trader.


£100 less corp tax 20% £80 dividend, less 25% is £60
£100 less persons 40% tax is £60

Looks the same to me.

pjclar02

To the OP:


Assuming your partner has no other personal sources of income, then the most tax efficient form of remuneration for 2013/14 is to pay a small salary, totalling £641 per month, or £7,692 per year, topped up by dividends. Your partner can then draw a further £30,382 in dividends per year, which works out as £2,531 per month, without incurring a personal tax liability.


This enables personal drawings £3,172 without a personal tax liability. Any dividends drawn over and above this level will be taxed at 25% until personal earnings reach the £100,000 level.


Accounting costs for limited companies these days can be as little as £300 if you use one of the online accountants, who tend to have low overheads and can undercut the traditional High Street accountant.

zygurat789

getmore4less wrote: »

this giving him a tax saving of 7.5% for using dividends via a company rather than 40% flat rate as a sole trader.


£100 less corp tax 20% £80 dividend, less 25% is £60
£100 less persons 40% tax is £60

Looks the same to me.

Apart from the £23.20 NICs

getmore4less

zygurat789 wrote: »

Apart from the £23.20 NICs

That's the point there is no TAX benefit only a NI contributions one.

And once into the 40% bracket it is 15.8% relative to PAYE(employers+employee)

self employed/sole trader they are lower for a class 4 that would be 2% on this upper earning level 9% below according to HMRC if I have it right.