PAYE and Dividend Income Taxing

**northernladuk** · 9 December 2013, 01:24

Here is a load of threads asking the same.

https://www.google.co.uk/search?q=pe...m=122&ie=UTF-8

Would be better to ask your accountant first and then if you are really unhappy with his answer double check here second.

**Brett at Nixon Williams** · 9 December 2013, 07:45

Originally posted by Geekman View Post

I had some PAYE income upto Aug 2013 this year (roughly about £35K) on which tax has already been deducted by my previous employer. Then I started by limited company(left the job). So my question is - is my PAYE income and dividend income taxed saperately? i.e. PAYE taxed as per the tax already deducted from my salary and I still get about £32K as tax free dividend income this year to 5-Apr 2014?
OR
Is My PAYE income and dividend income is added together and then tax applied to it?

How it matters to me is in the first case above, I will have to pay no additional tax (as it's already deduced fromy my salary). In the second case I will have to still pay tax on my dividend :-(

Hope this makes sense? Any advises will be really helpful to plan my tax. I am asking the same question to my account but wanted to couble check if there is any legitimate way to reduce my tax liability.

Thanks in advance!

Hi Geekman

You would need to consider all forms of income, I.e. The PAYE income and the gross dividends.

If your gross earnings are approx £35k in 2013/14 so far you will only have approx £5,800 to take in net dividends free of tax. Any dividend beyond this would be subject to further tax.

Hope this helps.

Brett

**Greg@CapitalCity** · 9 December 2013, 08:15

Originally posted by Geekman View Post

Hope this makes sense? Any advises will be really helpful to plan my tax. I am asking the same question to my account but wanted to couble check if there is any legitimate way to reduce my tax liability.

If you want to avoid paying any personal tax on your dividends then Brett has it right. There is no point taking a salary through your company, just take dividends - up to about £5,800. If you need more than that to live on, then there is one other thing to consider. Because your PAYE position ended mid-year its likely you have overpaid PAYE on that salary, and you can use this overpayment to offset any higher rate dividend tax.

Say for example you earned a gross salary of £7,000 per month for Apr, May, Jun, Jul, Aug - total for 5 months is £35,000. You were likely taxed on the basis you would get this salary for the whole year so monthly PAYE deductions would be around £1,950, and after 5 months a total of £9,750 in PAYE would have been deducted. Because your salary stopped in Aug, your PAYE deductions now look too big. On a £35,000 annual salary you would expect to pay £5,100 in PAYE, so you have a £4,650 overpayment in PAYE. I guess my point is, even if you exceed the higher rate threshold with dividends, you still have this overpaid PAYE tax sitting as a credit in your personal tax account, which you can use to offset any higher rate dividend tax.

Take your P45 along to your accountant - get them to calculate what you have overpaid in PAYE, and then formulate a plan from there.

**Brett at Nixon Williams** · 9 December 2013, 09:09

Greg makes a good point here too. If you keep your dividends within the basic rate band you will see the overpaid PAYE at source refunded. If your dividends exceed this, the overpaid PAYE will cover or go towards the extra tax due on the dividend.

Working with the example given this would allow you to take approx £18,600 in net dividends above the higher rate limit without actually having to pay any cash over to HMRC.

As suggested, it is worth running over this with your accountant to devise the best approach for you.

Brett

PAYE and Dividend Income Taxing