Maximum dividends before higher rate tax in 2014-2015
As the tax year progresses, many owners of small limited companies want to know the maximum amount that they can pay themselves in dividends in the current UK income tax year, before having to pay higher rates of tax.
Calculation of maximum dividend
First, the basics. Every tax year, all types of taxable income are added together, any allowances are deducted, and if the total is over a certain threshold, the amount of income over that threshold is subject to higher tax rates, first at 40% and then 45%. For most UK taxpayers, who do not make any private pension payments and do not have any other special tax allowances, the threshold for the year ended 5 April 2014 before deducting the standard personal allowance is £31,865.
The calculation is complicated by the fact that dividends are paid with “notional tax credits” attached. This simply means that the dividend that is paid is deemed to have had 10% tax deducted from it, although this 10% tax is not actually paid to anyone. The total of the actual dividend payment plus the 10% tax credit is the amount that needs to be used when looking at the total taxable income for the year. So, for example, a dividend payment of £27,000 is grossed up by the 10% tax credit to £30,000. This is the figure that is added to all other income to see whether higher rate tax is payable.
Rate of tax on dividends
Generally, dividends are assumed to be the top slice of income, and will thus be the income that falls to be taxed at the highest rate. If any dividends fall into the “40%” tax bracket, there will be additional tax to pay at the rate of 25% of the net dividend payment received (there is no extra tax to pay on any dividends that fall below the threshold). So, a dividend payment of £10,000 would result in an extra personal tax liability of £2,500. Gross income in the year of over £150,000 is taxed at the “45%” rate, and this works out at around 30% of the net dividend received.
For most owners of small limited companies, a typical example calculation for 2014/15 might be as follows:
|Salary from company||7,956|
|Company car benefit||800|
|Bank interest received (gross)||100|
|Dividends received from FTSE100 company (gross)||300|
|Rental income from buy-to-let (after expenses)||1,200|
|Total taxable income (excluding dividends from own company)||10,356|
|Less Personal Allowance||-10,000|
|Taxable income (excluding dividends from own company)||356|
|Full amount of basic rate tax band||31,865|
|Less already used (as above)||-356|
|Left available for dividends from own company||31,509|
|Deduct 10% notional tax credit||-3,151|
|Maximum net dividend payment that can be made without paying extra tax||£28,358|
In the simplest case of a person receiving a tax-efficient, minimal salary and no other income or allowances, recent maximum dividends have been:
|Tax year||Salary||Maximum net dividend|