Tax on Dividend Income

[robz8701]

Quick question in regards to tax on UK dividends. Based on 2014-15 if dividend income is less than £31,865 0% tax applies (10% offset by a tax credit of 10%).

If dividend income is above £31,865 does the 25% rate apply to the TOTAL dividend or just the dividends after £31,865? e.g. if I paid myself £50,000 dividend would I be paying 25% on £18,135 or the full £50,000?

[Kenny@MyAccountantFriend]

Tax on Dividends

You would need to reduce the dividends by the 10% tax credit, and take into account any other income you receive in the tax year first.

Assuming you have no other income using any of the tax free allowance, you could receive £28,678.50 in tax free dividends, taking account of the 10% deemed tax credit.

The actual rate of tax on the dividends in the higher rate bracket is 32.5%, however once accounting for the 10% tax credit your effective rate is 25%.

Therefore if you receive £50,000 in net dividends, £21,321.50 would be taxable at the 25% effective rate i.e. £5,330.38 payable in personal tax along with associated payments on account on your self assessment.

[convict]

just the amount above the threshold, not all of it. use a divi tax calc

[robz8701]

I don't follow where you have got the figure of £28,678.50 from?

Let's say it is a new tax year and based on 14/15 rates I decide to setup PAYE for the £10,000 personal allowance meaning a monthly salary of £833.33. No other income.

I then take out an additional total of £50,000 in dividends over the tax year. What is my tax liability on these?

1. 0% tax on the first £31,865 of the dividend and 25% on the remaining £18,135?
2. 0% tax on £10,000 personal allowance (PAYE) and £21,865 of dividends. 25% due on the remaining £28,135?
3. 25% tax on the full £50,000 dividends?
4. Something else?

[convict]

assuming you mean 50k in your personal bank (ie net dividends), your tax will be about 5330. use the link i sent you above.

[Kenny@MyAccountantFriend]

To calculate the net dividend you take the amount available of £31,865 and multiply it by 90% (alternatively divide by 10 then multiply the result by 9) this gives you £28,678.50.

You only pay personal tax on the amount over the basic rate band, as such £21,321.50 would be taxable income for you.

[ASB]

Of course the dividend income gets lumped together with other income in order to use up the nil rates and 20% bands. So it is not dividend income by itself. 10k salary, 10k something else and 30k dividend income = bill to pay.

[TheCyclingProgrammer]

I don't follow where you have got the figure of £28,678.50 from?

Let's say it is a new tax year and based on 14/15 rates I decide to setup PAYE for the £10,000 personal allowance meaning a monthly salary of £833.33. No other income.

I then take out an additional total of £50,000 in dividends over the tax year. What is my tax liability on these?

1. 0% tax on the first £31,865 of the dividend and 25% on the remaining £18,135?
2. 0% tax on £10,000 personal allowance (PAYE) and £21,865 of dividends. 25% due on the remaining £28,135?
3. 25% tax on the full £50,000 dividends?
4. Something else?

You need to decide whether or not you want to think of things in terms of gross dividends (before the tax credit) or net dividends (i.e. what you actually pay yourself as the 10% tax credit is notional).

If you want to think of things in terms of gross dividends (which is the number that is used when calculating your total taxable income), then:

1. First £31865 taxed at 10% but cancelled out by the 10% tax credit. This leaves you with £28678.50 net.
2. Gross dividends above this are taxed at 32.5% but you still get the 10% tax credit so the tax rate is effectively 22.5% (of the gross).

However, like I said as the 10% tax credit is notional its best to ignore it and just think of the amounts net of the tax credit, so as Kenny said:

1. First £28670.50 has no further tax to pay
2. All net dividends above this are taxed at an effective rate of 25% (this is the equivalent of 22.5% of the gross amount)

Of course, both these examples assume you have maxed out the £10k personal allowance by paying a salary and you have no other income - any other income reduces the amount of dividends you can take before you hit the higher rate.

I'm also ignoring the removal of the personal allowance over £100k and additional rate tax to keep things simple.

[PerfectStorm]

Being as we are just over a month until the new tax year, leave it in the bank if you can then take it out a couple days (?) after the start of the new tax year (which starts on 6th April). The money then will count into your new total, in addition to a presumed 10k salary. Or would that be 10,600 now? Anyone done the maths on that, taking the NI rebate into account yet?

[Rossco]

Being as we are just over a month until the new tax year, leave it in the bank if you can then take it out a couple days (?) after the start of the new tax year (which starts on 6th April). The money then will count into your new total, in addition to a presumed 10k salary. Or would that be 10,600 now? Anyone done the maths on that, taking the NI rebate into account yet?

i'm finding it frustrating. To fund my ISA this year i'll incur a tax hit despite a load of cash swilling in my ltd.. can i take a short term loan? ie 1 week