Dividend calcs - what's included as income?

mrrossi

Hi

Just trying to understand dividend calcs and the best way to go about paying myself (and potentially my wife) from my business account (I'm a contractor).

If I owned 100% of the shares (I currently do) and earned a 9K salary then I believe with the lower tax bracket set at 50k then I would pay the lower 7.5% interest on 41K of dividends (minus personal allowance and the 2000 dividend allowance). Any dividends above would be taxable at the higher rate if 32.5%.

However, I'm also bringing in 15k of property rental income. Do I need to factor that into the above? I.e. I would only be able to pay the lower 7.5% interest on (roughly) (50-9-15) £26K and the higher rate on the rest? Is that (more or less) correct?

I know there's a few more factors involved such as salary being deductible when you calculate Corporation tax etc etc but just trying to work out some rough numbers here.

Thinking of allocating somewhere between 10-30% of my shares to my wife and paying a dividend.

If I do decide to do the share split I need to work out what would be a sensible amount to pay to my wife. She's only making about £3000 a year working.

However she is selling a house this year and will earn some other income. This hasn't been done as a business - as this was a previous rental property, I believe this will be taxed from a Capital Gains Tax point of view. Let's assume that's correct. Therefore, is this NOT classed as 'personal income'? Does it get included or not when working out how much dividends she can receive without breaking into the higher tax band?

If I know whether that's included or not in her tax calcs then I can hopefully work out a reasonable amount to pay her (she WILL be doing some small amount of work for the business and I've been advised the max I can pay her is 30% of the dividends for what she's doing).

Thanks
Ross

Dazed_and_confused

(minus personal allowance and the 2000 dividend allowance).

There is no "allowance" for dividend income.

The first £2,000 of dividend income is taxed at 0% (the dividend nil rate) but that can mean your overall bill is still higher even though the £2,000 is taxed at 0% i.e. there may be more High Income Child Benefit Charge payable or you might lose entitlement to Marriage Allowance.

And yes you have to look at the overall picture to know what tax will be payable.

For example once the Personal Allowance has been used rental income is taxed before dividend income.

And the £2,000 dividend income taxed at 0% counts as using part of your basic rate band (or the higher rate band if income is high enough).

00ec25

mrrossi wrote: »

Hi

Just trying to understand dividend calcs and the best way to go about paying myself (and potentially my wife) from my business account (I'm a contractor).

If I owned 100% of the shares (I currently do) and earned a 9K salary then I believe with the lower tax bracket set at 50k then I would pay the lower 7.5% interest on 41K of dividends (minus personal allowance and the 2000 dividend allowance). Any dividends above would be taxable at the higher rate if 32.5%. correct

However, I'm also bringing in 15k of property rental income. Do I need to factor that into the above? very much so I.e. I would only be able to pay the lower 7.5% interest on (roughly) (50-9-15) £26K and the higher rate on the rest? Is that (more or less) correct?

I know there's a few more factors involved such as salary being deductible when you calculate Corporation tax etc etc but just trying to work out some rough numbers here.

Thinking of allocating somewhere between 10-30% of my shares to my wife and paying a dividend. what class of shares ?

If I do decide to do the share split I need to work out what would be a sensible amount to pay to my wife. She's only making about £3000 a year working. objective? she pays no tax? she pays some tax but keeps you out of higher rate? you both have the max income you can have as a couple whilst both remaining basic rate taxpayers?

However she is selling a house this year and will earn some other income. This hasn't been done as a business - as this was a previous rental property,no, the rent is income I believe this will be taxed from a Capital Gains Tax point of view. Let's assume that's correct it is correct if you mean the proceeds from the sale of the property . Therefore, is this NOT classed as 'personal income'? not quite, it is classed as part of "total income" for establishing what and how much CGT applies at the respective CGT rates Does it get included or not when working out how much dividends she can receive without breaking into the higher tax band? not included for dividend purposes

If I know whether that's included or not in her tax calcs then I can hopefully work out a reasonable amount to pay her (she WILL be doing some small amount of work for the business and I've been advised the max I can pay her is 30% of the dividends for what she's doing). advised by whom? what are their qualifications?

Thanks
Ross

you are somewhat confused.

income tax
for IT purposes divided income is classed as "top slice" therefore when toting up all sources of income you add in the following order (1 is the start , 3 is the top):
1. earnings from employment / self employment
2 property income
3 dividend income

therefore dividends will be the final amount taxed and may, or may not, therefore straddle a tax band

there is no such thing as 30% maximum "dividends"
either she holds equal class shares as you, or she holds "alphabet" shares of a different class with a different entitlement,

CGT
for CGT purposes you start with the total income subject to income tax and you add to that the net capital gain after CGT allowance. That "total income" dictates how much is taxed at the higher CGT rate

mrrossi

Thanks both.

Yes I was confused, that's why I asked the questions

Now I'm not!

The information provided is enough for me to do some calculations and decide how to proceed.

Cheers!