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, without 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 2015 is £41,865, being the personal allowance of £10,000 plus the basic rate band of £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 any higher tax rate 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 gets taxed at that person’s highest tax rate.
If the grossed up dividends, plus any other taxable income, less any allowable deductions, are less than £41,865, there is no extra tax to pay on the dividends.
If any dividends form part of total taxable income over £41,865, they will fall into the “40%” tax bracket. In this case, the gross dividend is taxed at 32.5%, and you are given credit for the 10% notional tax credit. This is equivalent to paying tax at a rate of 25% of the net dividend payment received. So, a dividend payment of £10,000 on top of other taxable income of say £50,000 is wholly above the threshold, and would result in an extra personal tax liability of £2,500.
A dividend payment of £10,000 on top of other taxable income of say £35,000 (so that only part of it is over the threshold) would work like this:
Gross dividend = £10,000 / 0.9 = £11,111.
Total taxable income = £11,111 + £35,000 = £46,111.
This exceeds the threshold of £41,865 by £4,246, which is the amount of the gross dividend which is subject to higher-rate tax.
Convert this part of the dividend back to net: £4,246 * 0.9 = £3,822.
Higher-rate tax payable on dividend = £3,822 * 25% = £955.
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 from FTSE100 company (gross)||300|
|Rental income (after expenses)||1,200|
|Total taxable income (excluding dividends from own company)||10,356|
|Less Personal Allowance||-10,000|
|Net 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 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||Max net dividend|