Tax Credit on Dividends

[CrazyMoose]

Accountants, Experts, Malvolio, Rob, Bel, Hugo, Lurch, Seb, SMG.....

Can someone PLEASE tell me how I calculate the tax credit on the net dividends I've paid myself?

I'm currently working through my Child Tax Credit form and i've been bashing my head on this last bit

Is the calculation NET DIVIDENDS PAID x (10/9) x 25%?

Cheers
CM

[CliveP]

I'm disappointed you didn't ask me CM? What's wrong - don't you think I know the answer?

Well, you'll be pleased to know that I went through the same fact finding process myself when I did my self assessment about 3 weeks ago.

The calculation to work out the tax credit on the dividends you've already rec'd from your LTD is:-

Dividends Received x (10/9) x 0.10 = Tax Credit

If you're a basic rate taxpayer, you pay 10% tax on all dividends. You then use the 10% tax credit to offset the tax and bring it down to 0%. So, to summarise, you don't pay any income tax on dividends paid up to the higher rate tax bracket c £40,000.

If some of the dividends you've received fall into the higher rate tax bracket, you effectively pay 25% on them. Which is calculated as:-

Tax Credit = Dividends Received x (10/9) x 0.10

e.g £900 x (10/9) x 0.10 = £100

Add the tax credit to the dividends received = £100 + £900 = £1,000

Tax payable = multiple the £1,000 by 32.5% = £325

Deduct the tax credit from the tax payable = £325 - £100 = £225

So, after the tax credit, you are due to pay £225 income tax on a £900 net dividend (or 25%)!

I Hope this helps, ask me again in future

[Pistachio]

Simple!

[The SMG]

Originally Posted by CliveP

I'm disappointed you didn't ask me CM? What's wrong - don't you think I know the answer?

Well, you'll be pleased to know that I went through the same fact finding process myself when I did my self assessment about 3 weeks ago.

The calculation to work out the tax credit on the dividends you've already rec'd from your LTD is:-

Dividends Received x (10/9) x 0.10 = Tax Credit

If you're a basic rate taxpayer, you pay 10% tax on all dividends. You then use the 10% tax credit to offset the tax and bring it down to 0%. So, to summarise, you don't pay any income tax on dividends paid up to the higher rate tax bracket c £40,000.

If some of the dividends you've received fall into the higher rate tax bracket, you effectively pay 25% on them. Which is calculated as:-

Tax Credit = Dividends Received x (10/9) x 0.10

e.g £900 x (10/9) x 0.10 = £100

Add the tax credit to the dividends received = £100 + £900 = £1,000

Tax payable = multiple the £1,000 by 32.5% = £325

Deduct the tax credit from the tax payable = £325 - £100 = £225

So, after the tax credit, you are due to pay £225 income tax on a £900 net dividend (or 25%)!

I Hope this helps, ask me again in future

Spot on Clive, that's a damn fine summary. I think it's also important to add that although dividends are income tax and employee's NIC free up to the higher rate threshold; you're still effectively paying 21% corporation tax on the profits of your business. This is chargeable PRE payment of dividends.

If you then enter the higher rate threshold, you're paying not only the 21% Corp Tax but also an extra 25% Income Tax on the dividends (which, if you look at it sensibly have already been taxed!).

So a £1000 company pre tax profit becomes £592.50 after CT and IT in your back pocket. Who said that contractors don't pay their fair share of taxes?!

Whoever it was, they were wrong....

G

[PhilAtBFCA]

The SMG

Contractors certainly do pay their fair share of taxes, lets look at some comparisons on your figures:-

Net Pre Tax Profit £1000
Corporation Tax £210
Net Dividend £790
Higher Rate Tax £195.50
Net Received £592.50

So in summary the Treasury gets £210+£195.50=407.50 or 40.75% of the Pre Tax profit of £1000

But if we looked at the Contractors Income Tax it would look like this:-

Net Dividend £790
Tax Credit £87.77
Gross Dividend £877.77
Higher Rate Tax Paid £195.50

Total Income Tax is £87.77 + £195.50 = £285.27 which is 32.5% of the Gross Dividend of £877.77

This is the figure that anyone having a go at Contractors would moan about....."only 32.5% tax an no ni, blah, blah...."

But if the £877.77 had all been taken as PAYE through any organisation paying 21% CT then the Treasury would have received:-


Income Tax at 40% on £877.77 is £351.08
Employers NI at 12.8% on £877.77 is £112.35
Employees NI at 1% on £877.77 which is £8.77
Corporation Tax Not Paid by employer as a result of costs of £877.77+£112.35=£990.12*.21=£207.93
Total Tax and NI which is £264.27 or 30.10% ( £472.20 tax an ni less £207.93 CT saved )

If the PAYE had been taken through a larger organisation paying more CT then the Govt would have received even less.

Conclusion , if you look at it like this then yes contractors do pay their share of taxes.

Phil

[The SMG]

Originally Posted by PhilAtBFCA

Conclusion , if you look at it like this then yes contractors do pay their share of taxes.

Phil

I know - that's what I said right?