Income Tax question.
Discussion
In the current tax year 2004/2005 I will be paying myself £22,400 Salary & £15,000 Dividend out of retained profits held from previous trading years. The Company will make a small profit of circa £5,000 this year.
I am uncertain of how much tax I will ultimately pay on the total earnings of £37,400. Obviously the monthly salary is subject to PAYE which is at the standard rate but adding the dividend takes overall earnings into 40% teritory. Is there a special tax %'age on dividends? I presume one declares the dividend on the endo of year return form and a tax bill is sent out accordingly.
In the year 2005/2006 I propose taking a much higher %'age of my remuneration as a dividend. I am fortunate that my Company has large sums of retained profit which I believe dividend can be paid out of without attracting any tax.
Is my thinking along the right lines??
Also, what about S2P pension contributions? What bearing would paying a salary under the Tax/NI threshold have on the state pension? I do have a private pension also which I pay a fixed amount into each month.
>>> Edited by Gucci on Thursday 25th November 15:30
I am uncertain of how much tax I will ultimately pay on the total earnings of £37,400. Obviously the monthly salary is subject to PAYE which is at the standard rate but adding the dividend takes overall earnings into 40% teritory. Is there a special tax %'age on dividends? I presume one declares the dividend on the endo of year return form and a tax bill is sent out accordingly.
In the year 2005/2006 I propose taking a much higher %'age of my remuneration as a dividend. I am fortunate that my Company has large sums of retained profit which I believe dividend can be paid out of without attracting any tax.
Is my thinking along the right lines??
Also, what about S2P pension contributions? What bearing would paying a salary under the Tax/NI threshold have on the state pension? I do have a private pension also which I pay a fixed amount into each month.
>>> Edited by Gucci on Thursday 25th November 15:30
The way dividends are taxed and how that tax interacts with Corporation Tax and other Income Tax can be quite complicated - and Gordon Brown brought in another little twist in the last budget.
The basic rules on director/shareholder payments is as follows-
Salaries:
Salary is taxed under the PAYE rules making use of the individual's Personal Tax Allowance for the year as indicated on their PAYE Notice of Coding. If your Gross Salary stays below £36,415 for 2004/05 (and you have the normal personal allowance of £4,745), then you will not pay any tax at 40% on your salary.
Your salary also attracts both Employee's National Insurance and Employer's National Insurance.
The full cost of your salary including the additional employer's NI is allowed as a business cost when calculating the company's profits for Corporation Tax purposes.
Dividends:
Dividends are subject to Income Tax but only when the individual's total income for the year takes them into the Higher Rate Tax bracket. For that to happen in 2004/05, their income has to exceed £31,400 over and above their personal tax allowance, £4,745 as set out above.
However, matters are not as straightforward as you might think. The dividend you receive into your hand is "deemed" to have been paid to you following deduction of Income Tax at 10% - even though no tax is actually deducted. If, for example, the company pays dividends totalling £10,000 to you in the 2004/05 tax year, you are deemed to have received a Gross Tax Inclusive dividend of £11,111 with a Tax Credit of £1,111.11. It is the figure of £11,111 that you include when adding up your income for the year (not £10,000).
Further to that, if your combined income for the tax year takes you into the Higher Rate Bracket, that element of income from your dividend which falls into the higher rate bracket is taxed, not at 40% but at 32.50%. Logic? Don't ask me, ask Gordon.
Dividends are not allowed as deductions when calculating the company's taxable profits.
Finally, a change made in this year's budget makes dividends slightly less attractive than they had been.
A company pays no Corporation Tax on profits of £10,000 or less. However, if a dividend is paid out of either current year profits or reserves built up from previous years' profits, it will be subject to a Corporation Tax charge at 19% of the value of the dividend, irrespective of whether the company's profit for the year falls above or below the £10,000 Zero Rate Band.
As you are no doubt aware, dividends are not subject to National Insurance.
The basic rules on director/shareholder payments is as follows-
Salaries:
Salary is taxed under the PAYE rules making use of the individual's Personal Tax Allowance for the year as indicated on their PAYE Notice of Coding. If your Gross Salary stays below £36,415 for 2004/05 (and you have the normal personal allowance of £4,745), then you will not pay any tax at 40% on your salary.
Your salary also attracts both Employee's National Insurance and Employer's National Insurance.
The full cost of your salary including the additional employer's NI is allowed as a business cost when calculating the company's profits for Corporation Tax purposes.
Dividends:
Dividends are subject to Income Tax but only when the individual's total income for the year takes them into the Higher Rate Tax bracket. For that to happen in 2004/05, their income has to exceed £31,400 over and above their personal tax allowance, £4,745 as set out above.
However, matters are not as straightforward as you might think. The dividend you receive into your hand is "deemed" to have been paid to you following deduction of Income Tax at 10% - even though no tax is actually deducted. If, for example, the company pays dividends totalling £10,000 to you in the 2004/05 tax year, you are deemed to have received a Gross Tax Inclusive dividend of £11,111 with a Tax Credit of £1,111.11. It is the figure of £11,111 that you include when adding up your income for the year (not £10,000).
Further to that, if your combined income for the tax year takes you into the Higher Rate Bracket, that element of income from your dividend which falls into the higher rate bracket is taxed, not at 40% but at 32.50%. Logic? Don't ask me, ask Gordon.
Dividends are not allowed as deductions when calculating the company's taxable profits.
Finally, a change made in this year's budget makes dividends slightly less attractive than they had been.
A company pays no Corporation Tax on profits of £10,000 or less. However, if a dividend is paid out of either current year profits or reserves built up from previous years' profits, it will be subject to a Corporation Tax charge at 19% of the value of the dividend, irrespective of whether the company's profit for the year falls above or below the £10,000 Zero Rate Band.
As you are no doubt aware, dividends are not subject to National Insurance.
Thanks Eric.
On the issue of paying dividend from previous years retained profits, surely Corp. Tax has already been paid on these in the year of profit. Is it correct that one pays 19% again?
Am I right in my calculations below?
Based on my Salary for the current year being £22,400 (PAYE / NI paid monthly) & a Dividend to be paid of £15,000 (+10% = £16,666.50). Total earnings for year would be classed as £39,066.50.
Based on my Std. personal allowance amount. The dividend payment would incur tax at 32.5% on £2,651.50 being the amount over and above the £36,415.00 limit.
As I would declare the dividend payment on my Annual Tax Return, a bill for £861.74 would be sent out later once processed by the IR.
On the issue of paying dividend from previous years retained profits, surely Corp. Tax has already been paid on these in the year of profit. Is it correct that one pays 19% again?
Am I right in my calculations below?
Based on my Salary for the current year being £22,400 (PAYE / NI paid monthly) & a Dividend to be paid of £15,000 (+10% = £16,666.50). Total earnings for year would be classed as £39,066.50.
Based on my Std. personal allowance amount. The dividend payment would incur tax at 32.5% on £2,651.50 being the amount over and above the £36,415.00 limit.
As I would declare the dividend payment on my Annual Tax Return, a bill for £861.74 would be sent out later once processed by the IR.
Gucci -
To be honest, it is a bit cheeky to start asking me to confirm your own tax calculations
Have you not got a tame accountant handy?
There are ethical issues you know that I, as a practisng accountant, must adhere to!
Yes, Gordon will, in effect, now tax the same bit of profit twice at 19%.
To be honest, it is a bit cheeky to start asking me to confirm your own tax calculations
Have you not got a tame accountant handy? There are ethical issues you know that I, as a practisng accountant, must adhere to!
Yes, Gordon will, in effect, now tax the same bit of profit twice at 19%.
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