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

Reaching for moneyFirst, 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.

Example

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
2004-05 £4,700 £28,301
2005-06 £4,800 £29,246
2006-07 £5,000 £30,002
2007-08 £5,200 £31,163
2008-09 £5,450 £31,847
2009-10 £5,725 £34,335
2010-11 £5,725 £34,335
2011-12 £7,080 £31,856
2012-13 £7,440 £31,530
2013-14 £7,680 £30,390
2014-15 £10,000 £28,679




68 Comments (oldest first)

  1. 1.  George says:

    What about tax credits, do they need to be taken into account?

    11 January 2013
  2. 2.  Admin says:

    No, tax credits are not taxable income, so they can be ignored.

    Other state benefits, such as the state pension, are taxable and so they need to be included.

    11 January 2013
  3. 3.  David says:

    If i take an annual salary of £7000, and my company is in strong profit, so i decide to take a dividend of say £15,000 which is higher than my annual salary, is this ok.

    SO:
    Company is in profit
    Salary is £7000
    £15K dividend, after all corporation tax has been paid and the company is in profit.

    Thanks

    27 April 2013
  4. 4.  Admin says:

    Yes, no problem.

    27 April 2013
  5. 5.  Daniel says:

    If I worked elsewhere and paid tax via PAYE on a 20K salary and was the only director of a LTD company which took out no salary but took out a 12000 dividend from the profit would I be liable for any personal income tax?

    I have not had any company cars or benefits and was already working for another PAYE employer until the company grew and then decided to take out the dividends so my understanding was my personal tax would have been covered and dividends would be taxed at 0% right as ltd company has already paid tax on the profits.

    Regards

    25 June 2013
  6. 6.  Admin says:

    Assuming that your tax code on your main job was appropriate, and there is no other income or other complications, then you would not be liable for any personal tax.

    25 June 2013
  7. 7.  \phil says:

    Do dividends added to salary go towards reducing personal allowance if total becomes in excess of £100,000?

    1 October 2013
  8. 8.  Admin says:

    Yes.

    1 October 2013
  9. 9.  Bill Ritchie says:

    If a shareholder just takes a dividend out of a business (and has no other income at all) rather than salary and dividend is he still entitled to personal allowance & then pay tax at 10% on the first 34k and 32.5% on balance below £150k?

    15 November 2013
  10. 10.  Admin says:

    Yes. In that case, his net dividends could be approx £38,000 before the 32.5% rate was reached.

    15 November 2013
  11. 11.  CRAIG says:

    I am employed by my LTD company. 7 years ago the company faced closure and I paid in £100,000 by way of company share holder. For this I became a company director. I receive a minimal salary by PAYE of Gross £600 per month but receive a dividend on profits of £2,500 a month direct to my bank account. I have been asked by the companys accountant for a UTR number - should I have registered for my own tax. Please help I feel sick and cannot sleep.

    28 November 2013
  12. 12.  Admin says:

    You only have to register for your own tax if you have any personal tax to pay. From the limited information given, you don’t.

    28 November 2013
  13. 13.  Newbie says:

    Thank you for this information - it’s very helpful. Sorry if my question is a bit basic but I’m in my first year of business and earned approx £18K as a PAYE employee before starting my own company. For tax efficiency, should I aim to keep my total income (i.e. £18K salary + any dividends) below £30,010. Or would I be able to take £30,010 dividend in addition to the £18K salary without paying tax on the dividends?

    22 December 2013
  14. 14.  Admin says:

    “For tax efficiency, should I aim to keep my total income (i.e. £18K salary + any dividends) below £30,010. Or would I be able to take £30,010 dividend in addition to the £18K salary without paying tax on the dividends?”

    Neither. I’m not sure where the £30,010 comes from, but with PAYE income of £18,000, your maximum dividends should be £21,000.

    22 December 2013
  15. 15.  fadi says:

    Hello,

    Is the tax on dividends taken on top of the corporate tax please? For example if I have a small one-person limited company do I pay the 20% net profit tax and then when I withdraw a dividend I pay on top 32.5% if the dividend falls over the £32k bracket? This means I pay tax on the same money twice. Or, is the corporate 20% tax deducted from the dividend tax and I pay 32.5%-20%=12.5%?
    Thank you.

    2 January 2014
  16. 16.  Admin says:

    “For example if I have a small one-person limited company do I pay the 20% net profit tax and then when I withdraw a dividend I pay on top 32.5% if the dividend falls over the £32k bracket?”

    Correct.

    “This means I pay tax on the same money twice.”

    Yes, but when added together the 2 taxes are broadly equivalent to the 40% higher rate of income tax.

    3 January 2014
  17. 17.  Susie says:

    Can you clarify for me. In the tax year 2013/14 if an individual has income of only £7,500 from non earnings and a received dividend of £50,000. (gross £55,555,56). The unused personal allowance (£9,440 - £7,500) of £1,940 …. can this be offset against dividend income for this tax year? Or would it mean that the whole dividend is liable to tax?

    9 January 2014
  18. 18.  Admin says:

    The whole of the personal allowance is compared with your total income when determining whether you are liable to higher rate tax on dividends.

    9 January 2014
  19. 19.  Help I'm going crazy!!! says:

    Hello, I have a LTD company and I am the only employee.

    If I earn £77,000 net per year.
    And have £11,000 expenses.

    This leaves £55,000 taxable income? ( £77,000- £11,000)

    £55,000 minus 20% Corp Tax ( £11,000 to pay in Corp Tax)

    Leaves £44,000 for dividends…

    Do I pay 10% on first £32,000
    Then 32.5% on remaining £12,000?

    Or 32.5% on full £44,000?

    Thanks in advance

    15 January 2014
  20. 20.  Admin says:

    “This leaves £55,000 taxable income? ( £77,000- £11,000)”

    I don’t understand that calculation, and I am not sure how a PAYE salary fits in with your situation (is it included in your “£11,000 expenses”?), but the basic idea is that you pay 10% up to the basic rate limit, not 32.5% on the whole lot.

    16 January 2014
  21. 21.  Tina says:

    Hello

    I am a housewife with no income but last tax year received dividends of £43,000. Do I have to pay any tax?

    Thank you

    25 January 2014
  22. 22.  Admin says:

    Yes, of about £1,200.

    25 January 2014
  23. 23.  Gerry Sheehan says:

    How does a personal pension affect the dividend limit. Mine used to be added directly to my tax code, thus reducing tax at 40% (as a permie). As a contractor taking dividends, my tax code is being lowered so that I now pay tax on dividends at the higher rate.

    10 February 2014
  24. 24.  Admin says:

    Qualifying payments to personal pensions increase the level at which you start to pay higher rate tax.

    A tax code is just a mechanism for collecting payments on account of tax from your salary each month. At the end of the year, your proper tax calculation is done, and you are given credit for any tax already collected through your tax code. It is nothing more significant than that.

    10 February 2014
  25. 25.  Anonymous says:

    I have about £60k profit in my biz account (that’s the amount left after I deduct the estimated 20% corp tax I will owe HMRC).

    I know that dividend wise this year I can only take about £28k plus my tiny monthly salary I pay myself to stay within the lower tax limit.

    But if I want to get my hands on the remaining profit that is in my biz account so I can use it as a deposit for a house, what are my options? A directors loan doesn’t sound like a good idea as I won’t be able to pay the money back anytime soon as it would be quite a lot, so is the only option biting the bullet and paying myself all the money in dividends and therefore paying the higher personal tax rate on it?

    Am I right in thinking that doing that will also mean I make myself liable for that horrid ‘pay 50% of that tax bill in advance of the next tax year’ personal tax thing?

    Thanks for your help

    19 February 2014
  26. 26.  Admin says:

    There aren’t many good options for you. Sometimes something can be done with loans, which you have ruled out. If your figure of £60k does not include a dividend for 2013/14, you can take £30k now and then £30k in April.

    You might want to look at this page: http://www.brighton-accountants.com/blog/extracting-surplus-from-dormant-company/

    You won’t have to pay 50% payments on account if the high dividend is a one-off.

    20 February 2014
  27. 27.  Kate says:

    I am a shareholder at the company i work for and get £7500 put through as my Annual Salary and £25000 put through as net dividends a year. I about to take up an offer on a company car for tax year 14/15 which has a bik value of £11k/year(inc fuel). How will this be calculated with my dividends and will it push me into the higher rate dividend tax?

    20 February 2014
  28. 28.  Admin says:

    £11,000 as a BIK value of a car seems really high. Are you sure this is the taxable value, or is it the list price of the car?

    20 February 2014
  29. 29.  Arky says:

    Hi.
    I am director of my own Ltd co.
    Gross profit =£150k
    Net profit after expenses = £110k
    I pay myself £7500 and take £30k dividend.
    I assume this keeps me personally below tax threshold?
    Question - can I do the same for my wife and son?
    They already earn £10k per year paye with other companies but can I give them dividends of £25k each?
    Do they need to be shareholders or directors?
    I am looking to maximise the amount we can take out annually
    Thanks

    23 February 2014
  30. 30.  Admin says:

    “I pay myself £7500 and take £30k dividend.
    I assume this keeps me personally below tax threshold?”

    Correct, assuming you have no other income.

    The rest of your question is a legal minefield, and you need full professional advice.

    24 February 2014
  31. 31.  Nelly says:

    I am confused about the amount of tax I will be liable for on my dividend. I work for a company and will earn approx £35K. I am also director of a limited company with estimated profits of £30K after corporation tax, if I pay this amount to myself as a dividend then how much tax will I be liable for? Thanks in advance.

    26 February 2014
  32. 32.  Admin says:

    Around £6,000 per year.

    26 February 2014
  33. 33.  Jo says:

    How much tax would be liaible if there was a salary of £7800, Rental Profits of £40k and a dividend of £50k

    27 February 2014
  34. 34.  Admin says:

    Around £22,000 per year.

    27 February 2014
  35. 35.  Kate says:

    Hi thanks for your response I am a little confused if I have given you the right figures for the benefit in kind value. The car is a new Volvo xc60 181 r design has a list price of £32k and has 19% p11d percentage charge? Also I will be getting free fuel so this needs to be included, is £11k incorrect?

    4 March 2014
  36. 36.  Admin says:

    It is probably correct. Without knowing any more, the £11K looked like the list price.

    Anyway, your salary, dividends and car benefit are all taxable, and when added together, take you around £4,000 into higher rate tax. How much tax you end up paying will depend on what happens to your tax code.

    5 March 2014
  37. 37.  Richard says:

    Hi Admin
    I invested in assets this year so as I approach my company YE I have about £30K cash in the company (which will cover remaining VAT, corp tax payable in next year)
    However I made profits of about £60K. I took salary of £9K already therefore thinking about dividends.
    Is it possible to say that I will pay a dividend based on my profits but at a later date than this year?
    How do you recognise that in the accounts?

    16 March 2014
  38. 38.  Admin says:

    I think there are 2 main possibilities here.

    1. You want to declare and pay a dividend now, as you have earned the profits, but you do not have enough cash in the bank to pay it. In this case, you can declare the dividend now, and instead of paying it from the bank account, leave it as owing to you. To do this, you have to follow the proper dividend procedure, which will partly depend on what it says in your articles of association.

    2. You do not want to declare and pay a dividend now, but you want to include something in the accounts reflecting some future intention to pay one. This is not necessary or appropriate. Dividends are accounted for when they are declared and paid. Any profits not paid out this year are carried forward until they are paid.

    16 March 2014
  39. 39.  Lee says:

    Hi, I hope you can help me. I can’t seem to get the right figures when I try to work out my income tax. This is what I’m doing: I have a limited company with a gross profit of £135,106. If I take a salary of £7,696, then the company’s taxable profit is £127,410. The corporation tax is £25,482, leaving a post-corporation tax profit of £101,928. If I take 100% of this as dividends and add the 10% tax credit then I have a dividend income of £113,253 and a total gross income of £120,949. Given that my income is then too high for any personal allowance, my taxable income is £120,949. I then took that figure from £32,010 to give me £88,939 and then worked out my income tax as being 22.5% of that (32.5% minus 10% for the tax credit), which is £20,011. But according to several online calculators, it should be £21,550. What am I doing wrong?

    18 March 2014
  40. 40.  Admin says:

    “Given that my income is then too high for any personal allowance, my taxable income is £120,949. I then took that figure from £32,010 to give me £88,939 and then worked out my income tax as being 22.5% of that”

    That is where you are going wrong. You do not have £120,949 of dividend income, you have a salary of £7,696 (to be taxed at 20%) and the rest as dividends to be taxed at dividend rates of tax.

    The extra tax is explained as £7,696 at 20%.

    18 March 2014
  41. 41.  JP says:

    Hi, I’m an IT contractor and my company’s gross profit is £120,960 (with VAT).

    After deductions of…
    VAT (14% Flat rate) £16934.4
    Salary £9480
    Expenses £3000
    Corp tax £18309.12

    This leaves a net profit of £73,236.48 so If I take £28,000 as a dividend, do I then just pay tax of 10% up to the basic rate limit, then 32.5% beyond that when paying myself?

    19 March 2014
  42. 42.  Admin says:

    Yes, bearing in mind that the dividend has a notional 10% tax credit attached.

    19 March 2014
  43. 43.  SN says:

    For year ended Mar 2014, I take £7,680 as salary and £30,390 as dividends from my limited company. If I then contribute £15,000 into a personal pension plan:
    a) Will my basic rate tax band be extended by the full £15k?
    b) Or is dividends not treated as “earnings” for pension relief contribution? Thus limiting the basic rate band extension to only £7.6k of salary?

    28 March 2014
  44. 44.  Admin says:

    Dividends are not treated as “earnings” for pension relief purposes.

    29 March 2014
  45. 45.  MMc says:

    Hello. I am 75% shareholder in small Ltd Co. There are retained profits in our accounts of £58k from build up over previous years. Profit after Corp tax tends to fluctuate between £26k and £45k annually. I take basic PAYE salary of £890 per month and dividend of £1100 per month (Company already paying Corp Tax on profits) My accountant thinks it’s best to show retained profits (reason being how company is perceived by creditors) and not maximise my dividend to higher rate tax threshold (using retained profits). What do you think? Incidentally, business credit worthiness has always been excellent. My view is that best to allocate dividends to higher rate tax threshold and build loan account within business to ensure cash reserves are strong. If I ever want my cash out in a lump sum I know tax has been paid…Sorry, ‘War and Peace’ here!

    2 April 2014
  46. 46.  Admin says:

    Declaring a dividend, even if paid to a loan account rather than paid out of the company, does reduce the net assets of the company and so does reduce its credit worthiness. How you balance that against the benefit of using your full basic rate tax band each year, only you and your accountant can decide. However, based on the profit level of your company, having retained profits of £58k seems a bit over-prudent.

    2 April 2014
  47. 47.  Liz says:

    Hi. Thank you for your helpful article. For the tax year 2014/2015 I will have no income except dividend income from my company. If my company declares a dividend of £41,865 out of £48,000 post corporation tax profits, is it correct that (1) I will still be a basic rate taxpayer, (2) I will receive £37,649.50 net of the notional 10% tax credit, and that I do not have to pay any additional tax on this, and (3) the company retains £10,350.50. Many thanks in advance.

    15 April 2014
  48. 48.  Admin says:

    The amount declared by the company is the net amount that you receive. So if you declare £41,865, you will receive £41,865 net of the notional 10% tax credit and there will be about £1,000 of tax to pay.

    If you declare a dividend of £37,679:

    You will still be a basic rate taxpayer;

    You do not have to pay any additional tax on this; and

    The company retains £10,322.

    15 April 2014
  49. 49.  Liz says:

    Many thanks for clarifying. Please can I ask one further question: the company has pre-tax profits of £60,000, the company pays me a salary of £7,800, and a dividend of 34,065. Is it correct that (1) I don’t have to pay any tax on the total amount of £41,865 received by me, (2) £10,335 is left in the company. Thank you for all your help.

    16 April 2014
  50. 50.  Admin says:

    This is different from the previous scenario, due to the £7,800 salary. The combined income is now above the threshold, and there would be about £1,000 of tax to pay. Remember that you have to gross up the dividend received for the 10% notional tax credit.

    For the amount left in the company, I am unclear whether the “pre-tax profits of £60,000″ are before or after deducting the £7,800 salary. It should be after, but you appear to have placed it before?

    16 April 2014
  51. 51.  Liz says:

    Hi Admin. The £7,800 is after the £60,000. So my total profits would be £60,000. I would then deduct £7,800 salary. I would pay 20% corporation tax on £52,200. That would leave £41,760 from which to declare a dividend. I see your point that I didn’t gross up the dividend. So I guess the dividend should be £30,658.50? That would mean I would receive £38,458.50 without paying further tax, and leave £11,101.50 in the company?

    16 April 2014
  52. 52.  Admin says:

    Yes, that all sounds about right.

    17 April 2014
  53. 53.  David England says:

    Hi Admin. For 2014/15, with gross income (including personal allowance of £10000) extending to £41865 for tax at the basic rate, if I were to take a salary from my company of £5772, is it correct that the maximum dividend I could take, including the 10% tax credit, would be £36093 (£32483.70 net) without incurring any additional tax liability on the dividend?

    20 April 2014
  54. 54.  Admin says:

    Correct.

    21 April 2014
  55. 55.  Steven Barr says:

    Hi,
    Thanks for the really useful article.
    I’m the director of a Ltd company that will take about 60k of revenue with about 7k of direct expenses giving a potential net profit of 53k before any salaries, etc.
    I’m also intending to start paid employment that should give me income of about 50k this tax year and which I’ll be registered on PAYE.

    My question is whether I need to pay myself a minimal salary from the Ltd company, or would I be better taking money out as dividends only ?

    21 April 2014
  56. 56.  Admin says:

    I cannot give a definitive answer without full knowledge of your circumstances, but from the information given, there would appear to be little point taking a director’s salary.

    21 April 2014
  57. 57.  Matti says:

    I was self employed in 1314 (6 april till 5 april). In September 2013 I started LTD and paid dividends to myself of 12k till 05 april 2014. My self-employment profits for 1314 were 7k.
    Should I be prepared to pay any tax to revenue in this case? if so how much
    Should 13333.33 goes on my tax return in dividend section or 12k (amount paid to my personal account from LTD) or nothing at all cos it was taxed already as corp tax so it is not needed to disclose it ?

    29 April 2014
  58. 58.  Admin says:

    “Should I be prepared to pay any tax to revenue in this case?”
    No, not if that was your only income.

    You need to enter the net dividend of £12,000 on the tax return. The fact that corporation tax has been paid is irrelevant.

    30 April 2014
  59. 59.  Rob says:

    Hi,

    I’m a director of a business and take a salary of £7,920, and draw a dividend of £28,000 per year paid monthly.

    Will I be a higher band tax payer on the dividend payments?

    22 May 2014
  60. 60.  Admin says:

    No.

    22 May 2014
  61. 61.  Dave says:

    Hello and many many thanks for clearing this complicated matter.

    So if I understand correctly.

    My wife and I are both directors of our small LTD.

    If we take 2013 for instance and one of us two since we get payd the same:

    Salary from company £7680
    interest from saving of £10489 Gross
    Total taxable income £18169
    Less Personal Allowance -10,000
    Taxable income (excluding dividends from own company)£8169

    Full amount of basic rate tax band £30390
    Less already used (as above) -8169
    Left available for dividends from own company £22221
    Deduct 10% notional tax credit -2222
    Maximum net dividend payment that can be made without paying extra tax £19999

    Does this sound about correct?

    Many thanks in advance
    Dave

    28 May 2014
  62. 62.  Admin says:

    You are not far off. I am not sure exactly which tax year you mean by “2013″. The “Full amount of basic rate tax band” has never been £30,390; if you are talking about 2012/13, it will be £34,370.

    28 May 2014
  63. 63.  Dave says:

    Oops sorry, Yeah I have no idea where I got that figure???

    Nevertheless, thank you for the super fast reply!!

    So it would be more like this for 2012/2013 ?

    Salary from company £7680
    interest from saving of £10489 Gross
    Total taxable income £18169
    Less Personal Allowance -8105
    Taxable income (excluding dividends from own company)£10064

    Full amount of basic rate tax band £34370
    Less already used (as above) -10064
    Left available for dividends from own company £24306
    Deduct 10% notional tax credit -2430
    Maximum net dividend payment that can be made without paying extra tax £21876

    Does this sound accurate???

    So for 2013/2014

    The same calculation would apply,

    But with these figures:

    Personal Allowance £9440 instead of £8105
    Full amount of basic rate tax band £32010 instead of £34370

    Once again thank you for your time.
    Dave

    29 May 2014
  64. 64.  Admin says:

    That is correct.

    29 May 2014
  65. 65.  Paul says:

    Hi Admin,

    If I receive my lower rate tax allowance as a salary from my limited company (excluding me from NI contributions) and receive dividends from profits after corporation tax of £40,000 do these 2 figures get put together to give me an overall income of £48,000 thus putting me into the higher rate tax band?

    17 July 2014
  66. 66.  Admin says:

    You have to gross up your dividends by the 10% notional tax credit. Otherwise, that’s correct.

    17 July 2014
  67. 67.  Andy says:

    Hi,

    Thanks for the very useful article. I’m not sure your figures at the end are right though - for 2014/15 if I took salary of £10,000 then I would have £28,968 available to take as dividends before hitting the 40% tax band. Or another way of calculating it is to do £31,865 divided by 1.1. Is that right?!

    18 July 2014
  68. 68.  Admin says:

    No. You do not divide the £31,865 by 1.1, you multiply it by 0.9.

    18 July 2014

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