UK tax question

[vhadiant]

Hi all,

I'm struggling a bit trying to understand the basic of UK taxation system (this makes our Australian tax seems like elementary). I do not understand the implication of the different rate of the income tax.

For example:

I'm a director of my own Ltd. Co. and paying myself £10,600 a year.
I would pay:
Tax £914.90
NI: £594.00

That's easy to figure out using the basic calculator after factoring tax free allowance and the tax table.

My question is how does the tax for the company dividend and your interest from saving is calculated?

Say I take £50,000 of dividend in the 2007/2008 tax year. Does the calculation of the dividend starts from 10,600 (on top of the salary)?

Another question is about the interest gain on saving account (non ISA). Does the bank take the tax before passing the interest in my account? On the above example, say I earn $1500 for the 2007/2008 financial year, how much tax do I have to pay? Or probably none as the bank has already taken the interest.

In Australia the tax is not taken out from the interest paid into your account and it's your responsibility to add it in your annual tax return.

Doing your tax at the end of the year is compulsory for us, but seems that this is not the case in the UK. So how do you make sure that you pay the correct amount of tax if you don't have to do your tax return? (I suppose it doesn't apply for most of us here in this forum as we're probably have our Ltd. Co. and thus have to file tax return at the end of the year).

Hope someone can help.

[Sausage Surprise]

Do you not have an accountant?

[LGDT]

My question is how does the tax for the company dividend and your interest from saving is calculated?

Say I take £50,000 of dividend in the 2007/2008 tax year. Does the calculation of the dividend starts from 10,600 (on top of the salary)?

The dividend attracts a tax credit of 10% - this is because a dividend is a distribution of taxed profits. The tax credit is to prevent double taxation.

So what you do is multiply your £50k divi by 1/9 - giving £5555.55 and add this to the distributed dividend.

Another question is about the interest gain on saving account (non ISA). Does the bank take the tax before passing the interest in my account? On the above example, say I earn $1500 for the 2007/2008 financial year, how much tax do I have to pay? Or probably none as the bank has already taken the interest

Your bank will provide you with a statement of interest earned. They will have deducted the tax (20% on savings) at source. But you still have to declare the interest on your tax return. This is also added to your gross income for the year.

In Australia the tax is not taken out from the interest paid into your account and it's your responsibility to add it in your annual tax return.

Doing your tax at the end of the year is compulsory for us, but seems that this is not the case in the UK. So how do you make sure that you pay the correct amount of tax if you don't have to do your tax return? (I suppose it doesn't apply for most of us here in this forum as we're probably have our Ltd. Co. and thus have to file tax return at the end of the year).

You have to add up all of your gross income:
Salary + dividend + dividend tax credit + interest on savings. This all goes on the self assessment tax return. Then you have a personal allowance to deduct from this – £5035 for 2006-2007 – which will leave your taxable income at around £61120 minus the tax already paid on your salary. This would obviously be way over the 40% threshold (£33000) so there will be a significant amount of additional tax to pay. This tax will become payable by 31st January of the following tax year if you want to avoid interest and penalties.

Caveat emptor - this is a rough and ready guide and I am not an accountant so you should check with yours.

[vhadiant]

Do you not have an accountant?

I do but I'd like to know how this works too, just to double check. I may not be as proficient as my accountant but at least I know how to do a basic tax return. It's an Australian thing since we all have to do one at the end of the financial year.

[vhadiant]

T
This would obviously be way over the 40% threshold (£33000) so there will be a significant amount of additional tax to pay. This tax will become payable by 31st January of the following tax year if you want to avoid interest and penalties.

But just how much the tax is paid on the dividend and saving? They have different tax table with income tax.

[LGDT]

But just how much the tax is paid on the dividend and saving? They have different tax table with income tax.

Any income you receive above the tax threshold will be taxed at 40%.

[XLMonkey]

But just how much the tax is paid on the dividend and saving? They have different tax table with income tax.

On the dividend, you pay NO additional tax until your total income (including salary) exceeds the higher rate threshold. You pay an additional 25% tax on the dividend income above this threshold.

The reason that it is 25%, not 40%, is that your company will already have paid 20-22% corporation tax on the money before it gave you the dividend.

The dividend tax credit that you use on your tax return is a mathematical tool designed to offset the corporation tax that has already paid before you receive it.

It does work, but it was designed by an accountant, not a human being. So, naturally, it is unnecessarily complicated.

[XLMonkey]

But just how much the tax is paid on the dividend and saving? They have different tax table with income tax.

Savings income will be taxed at the higher rate, but since the bank has already deducted 20% at source, you would pay an additional 20% on the income that is above the higher rate tax threshold.