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Where Taxpayers and Advisers Meet

Tax on Profits

andy M
Posts:1
Joined:Wed Aug 06, 2008 3:32 pm

Postby andy M » Mon Dec 12, 2005 1:43 am

Can anyone help as I'm slightly confused on how much tax we will pay at the end of this year.
Myself and a partner run a small business which will this year make a profit of 60k. Partner and I both have 50% shareholding in the company and have so far this year paid ourselves £10k each through PAYE. Would like to distribute the profit via a dividend as I am informed that once CT is paid at 19%. The remaining £48600 we could both take tax free as we would only just reach higher tax rate. Could someone show me a quick calculation of how this would work as I'm confused about the tax credit?.

deanshepherd
Posts:1019
Joined:Wed Aug 06, 2008 3:23 pm

Postby deanshepherd » Mon Dec 12, 2005 3:46 am

If you pay a dividend of £24,300 then it will come with an associated tax credit of 10%. This is purely notional, the compay doesn't have to pay the 10% anywhere.

Therefore, on your dividend voucher from the company it will show a net dividend of £24,300 (90%) and tax credit of £2,700 (10%). The gross dividend to enter on your tax return will be £27,000 which added to your salary of £10k which actually be just below the higher rate threshold (remember you have your tax free personal allowance of £4,895 to deduct).

Dividends received below the higher rate tax threshold are taxed at 10% so it is covered by the tax credit and you should have no further tax to pay (depending whether you have any other taxable income).


Dean Shepherd
dean.shepherd@mmi-online.co.uk
MMI Accountancy
www.mmi-online.co.uk

JulieS
Posts:14
Joined:Wed Aug 06, 2008 3:32 pm

Postby JulieS » Tue Dec 13, 2005 3:46 am

...but don't forget cash flow if you are routinely taking out all your profits : you have to find 19% of your Dividend payment for your CT bill. That might alter the dividend you'd like to pay yourself. This isn't obvious to all.......

gwb68
Posts:9
Joined:Wed Aug 06, 2008 3:21 pm

Postby gwb68 » Wed Dec 14, 2005 7:17 am

Im in a similar position to andy, I and my wife are taking salary of 10k each and dividend of 32K each.
just to clarify do I pay tax on the dividend of 10%?
does the dividend get classed as company profits?
do I have to pay 19% on top of the 10% through the company?
Any other profits made over this amount is this taxed at 19%?
thanks in advance to a confused 1st year as Ltd company.

deanshepherd
Posts:1019
Joined:Wed Aug 06, 2008 3:23 pm

Postby deanshepherd » Wed Dec 14, 2005 7:44 am

I would not recommend trying to balance personal and corporation tax without the help of an accountant but broadly speaking..

Salary reduces the company profits for tax purposes but dividend payments do not. The Company will be paying tax on its profits at 19%. The remaining profit (AFTER tax has been paid) can then be withdrawn as dividends. The 10% tax credit can be ignored as far as the company is concerned.

A £32k dividend is taxed on you personally as if it was £36,556 minus a 10% tax credit of £4,556. If you add the £36,556 to the £10k salary then you will be a higher rate taxpayer and further tax will be payable on your income.

You may also wish to review the 'settlements legislation' and whether this applies to you and your wife.


Dean Shepherd
dean.shepherd@mmi-online.co.uk
MMI Accountancy
www.mmi-online.co.uk

gwb68
Posts:9
Joined:Wed Aug 06, 2008 3:21 pm

Postby gwb68 » Wed Dec 14, 2005 8:28 am

thanks Dean,

just to clarify, if my salary is 10K and my personal allowance is £ 4,895, dividend is
£ 27,295 total 32.4K
do I have to pay 10% on the £27,295 dividend in tax ?
sorry bit unsure on tax credit!

deanshepherd
Posts:1019
Joined:Wed Aug 06, 2008 3:23 pm

Postby deanshepherd » Wed Dec 14, 2005 8:56 am

Yes and no!

Yes you pay tax at 10% on the dividend but it is covered by the 10% tax credit that is attached. Therefore, you do not pay any further tax when it comes to doing your tax return.

HOWEVER, £27,295 I assume is the GROSS dividend. The maximum you can physically withdraw from the company and not pay higher rate tax is a NET dividend of £24,565 on top of your £10k salary.

It is a bit complicated which is why it helps to have an accountant!


Dean Shepherd
dean.shepherd@mmi-online.co.uk
MMI Accountancy
www.mmi-online.co.uk

gwb68
Posts:9
Joined:Wed Aug 06, 2008 3:21 pm

Postby gwb68 » Wed Dec 14, 2005 9:23 am

Dean

thanks for your help, really appreciate it.

Halflife
Posts:1
Joined:Wed Aug 06, 2008 3:32 pm

Postby Halflife » Thu Dec 22, 2005 7:38 pm

I've just been working through this myself and can maybe present it from a different perspective although everything on this page is correct, it's not how I think about it.

Suppose your company makes 30k profit (after salary and expenses).
Corporation tax'll take 19%, so the company will have 24300.

Suppose you want to pay all this as a dividend.
Write a cheque for 24300.
Write a dividend certificate for a dividend of 24300 and a tax credit of 2700.
The thing it's taken me 3 years to get is that from the company's point of view, the tax credit is 11.11% of the amount actually being paid over. Furthermore, the 2700 never actually gets paid to anyone, neither taxman nor you as employee.

As employee, put the cheque in the bank and on your tax return put dividend=24300, tax credit=2700, dividend plus tax credit=27000.
Remember that all 27000 will be assessed as income, even though 2700 of it never really existed. If you are trying to adjust your income to avoid higher rate tax, it is the 27000 figure that must fall into the basic rate bracket, not the 24300. If the 27000 falls into the basic rate bracket, it will attract a tax bill of 2700 (10%), but this will be offset against the 2700 tax credit and you should not have to pay any more to the taxman.

I hope this helps someone, but even more I hope that I've finally got it right this year.


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