A client query:
How much dividend can I draw from my company if I don’t wand to incur a personal tax liability? My salary is £10,000, and there are no other shareholders in the company.
Our reply:
Assuming no other income the calculation is (121/13 rates):
Personal allowance £8,105
Basic Rate band £34,370
Less salary £10,000
Equates to £32,475 worth of further income.
However you need to gross this down at 9/10 to account for the 10% tax charge on dividends so the dividend amount you can take in cash is £29,227.
That counts as £29,227 net, £32,475 gross with basic rate tax paid at 10%.
Special rules mean that (a) dividends carry a notional 10% tax credit against Corporation Tax already paid (probably at 20%) and (b) dividends in the basic rate band are taxed at 10% not 20%.
As the dividend comes from your company profit after Corporation Tax effectively the £29,227 has already had 20% paid on it, hence why there is a notional tax credit / charge at the 10% rate. Why 10% not 20%? Well that was to do with restricting tax credits for pension schemes and charities.
So, assuming you have sufficient profits in your company after setting aside for Corporation Tax you can withdraw £29,227 without further tax charge.
Supplementary question? If I take out more than that?
Answer: 25% of the amount taken out. So if you take out £10,000 as a dividend then £2,500 personal tax.
25% is calculated to collect the equivalent of 20%, being the difference between Basic Rate Tax 20% and Higher Rate Tax 40%, on a net amount with 10% tax credit.
The maths on £10,000 net are:
£10,000 grossed up at 20% (the normal Basic Rate Tax band rather than the notional 10%)= £12,500. 20% (the difference between basic Rate and Higher Rate) of this would would be £2,500 – which is the same as 25% on the net £10,000.
Sometimes reference is made to a 22.5% tax rate – thats on the gross with the notional 10% credit, eg £10,000 net, grossed up at 9/10ths = £11,111 x 22.5% = £2,500
Sorry I asked!