Can Someone explain the Tax basics to me!

[ChrisPackit]

Can Someone explain the Tax basics to me!

I have recently come back into contracting, and I'm confused what my new accountant is telling me. Can someone in the know explain what percentages I will be paying over what figures, assuming (For example):

The company earned £100K before VAT in a 12 month period
The Company has one Director on a salary of £10K
The Directors tax code allows for circa £5K

I was under the impression that the dividend to myself would be taxed ar 20%, but my guy is telling me that income over circa £50K will be taxed at 25%.

Im Confused .com

Please help.

[malvolio]

Can Someone explain the Tax basics to me!

I have recently come back into contracting, and I'm confused what my new accountant is telling me. Can someone in the know explain what percentages I will be paying over what figures, assuming (For example):

The company earned £100K before VAT in a 12 month period
The Company has one Director on a salary of £10K
The Directors tax code allows for circa £5K

I was under the impression that the dividend to myself would be taxed ar 20%, but my guy is telling me that income over circa £50K will be taxed at 25%.

Im Confused .com

Please help.

Sigh...

No. If you don't' understand what your accountant is telling you, get them to explain it in smaller and smaller words until you do. You're paying him, remember.

Or you could start from HM Revenue & Customs: Home Page and do some searching: it's all in there.

Your accountant is right, by the way. HTH

[LisaContractorUmbrella]

Sigh...

No. If you don't' understand what your accountant is telling you, get them to explain it in smaller and smaller words until you do. You're paying him, remember.

Or you could start from HM Revenue & Customs: Home Page and do some searching: it's all in there.

Your accountant is right, by the way. HTH

Mal you're getting soft in your old age

[Clare@InTouch]

Can Someone explain the Tax basics to me!

I have recently come back into contracting, and I'm confused what my new accountant is telling me. Can someone in the know explain what percentages I will be paying over what figures, assuming (For example):

The company earned £100K before VAT in a 12 month period
The Company has one Director on a salary of £10K
The Directors tax code allows for circa £5K

I was under the impression that the dividend to myself would be taxed ar 20%, but my guy is telling me that income over circa £50K will be taxed at 25%.

Im Confused .com

Please help.

Income is taxed:

0-37,400 - basic rate band
37,401 - 150,000 higher rate band
150,001 upwards - additional rate band

Your tax code will increase the basic rate band, usually up to 43,875 (with a tax code of 647L).

Salary is taxed at 20% in the basic rate band.

Dividends are taxed at 10% in the basic rate band, but they also have a 10% tax credit, so it's effectively zero. If you pay yourself £1,000 what you've actually received is £1,111 with tax paid of £111. This 'notional' tax credit needs to be considered when thinking about tax bands.

In the higher rate band dividends are taxed at 32.5%, less the 10% tax credit to give 22.5%. This equates to 25% of the net (A gross dividend of £1,111 taxed at 22.5% = £250 and a net dividend of £1,000 taxed at 25% = £250).


I agree with Mal though - ask your accountant to explain if you don't understand something. You're responsible for your taxes, and you'll be paying interest and penalties if it's wrong. It's essential that you understand what's going on, and you should have an accountant who you can talk to and ask questions of (even if he has to explain it a dozen times, he should be happy to do so to ensure you're happy).

[Craig@Clarity]

Duplicated response