avoid 40% dividend tax

[phillcooper]

hi,

I am currently contracting, my wife is a director so we split the dividends 50/50.

It's looking like we will both go over the 30k dividend threshold and have to pay 40% on dividends we receive over that.

Does anyone know of any ways we can avoid having to pay this 40%. i.e. is there a different way we can take the money out etc.

Thanks

[Louisa@InTouch]

The tax due on the dividends over the higher rate threshold wouldn't be 40%.

Instead, it will actually only be 25% effectively on the excess net dividends...

Reducing your thoughts on your tax bill by 15%

An option could be that actually the payments you took previously were not dividends but instead were a loan. However you would need to be aware of the benefit in kind implications for an interest free loan, if this exceeded £10,000 at any point in the tax year.

[northernladuk]

The tax due on the dividends over the higher rate threshold wouldn't be 40%.

Instead, it will actually only be 25% effectively on the excess net dividends...

Reducing your thoughts on your tax bill by 15%

And that's exactly why you need to speak to your accountant first.

[phillcooper]

25% is a lot better than 40%.

I don't quote understand what you mean about the loan. Could you explain it a bit?

Thanks

[phillcooper]

And that's exactly why you need to speak to your accountant first.

I have spoken to my accountant, and they said there's nothing I can do.

[northernladuk]

IMO I don't think it's great advice to start offering DL's out as a tax mitigation strategy. Far too much to go wrong and they maybe needed to fix issues over year end so end up costing you more if the DL option is not available.

[northernladuk]

How much of a warchest do you have and where is it?

Are you paying in to a pension?

[phillcooper]

warchest is virtually none existent at the minute (although slowly building).

Not interested in pensions.

looking on the net doesn't seem to throw up any ways to get around it.

[jamesbrown]

25% is a lot better than 40%.

I don't quote understand what you mean about the loan. Could you explain it a bit?

Thanks

You can take a director's loan (DR) from the company in order to avoid a dividend in the short-term, but it obviously needs to be paid back, so it generally only makes sense if you can pay it back with a dividend at a lower tax rate in a future personal tax year.

If your DR account exceeds 10k during the year, you will personally incur a benefit in kind (BIK) tax in proportion to the interest saved (vs. a "commercial" loan), unless you are paying a commercial rate of interest on the loan. You cannot claim this back.

Further, if the loan is outstanding for more than 9 months after the company year end, an s455 charge will be payable at 25% of the outstanding amount. This can be reclaimed when the amount is eventually paid off, but there's a delay in getting it back (again, 9 months after the company year end in which the part/full payment is made).

Bottom line, it rarely makes sense to take a DR to avoid a higher-rate dividend, but it can in some circumstances. We can't help on those details; you'll need to discuss them with your accountant.

[jamesbrown]

You can take a director's loan (DR) from the company in order to avoid a dividend in the short-term, but it obviously needs to be paid back, so it generally only makes sense if you can pay it back with a dividend at a lower tax rate in a future personal tax year.

If your DR account exceeds 10k during the year, you will personally incur a benefit in kind (BIK) tax in proportion to the interest saved (vs. a "commercial" loan), unless you are paying a commercial rate of interest on the loan. You cannot claim this back.

Further, if the loan is outstanding for more than 9 months after the company year end, an s455 charge will be payable at 25% of the outstanding amount. This can be reclaimed when the amount is eventually paid off, but there's a delay in getting it back (again, 9 months after the company year end in which the part/full payment is made).

Bottom line, it rarely makes sense to take a DR to avoid a higher-rate dividend, but it can in some circumstances. We can't help on those details; you'll need to discuss them with your accountant.

ps. your confusion with the 40% vs. 25% originates from the gross vs. net amount of tax paid. You pay 25% on the net dividend above the higher rate threshold, but this is effectively 40% when accounting for CT @20% and grossing up.