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.