Is the net take home higher on new didvend regime?

Is the net take home higher on new didvend regime?

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I was asked to do a quick bit of research on the new dividend regime and after doing some calculations I worked out that if a basic rate taxpayer for next tax year drew out the minimum salary and then dividends to bring them up to the basic rate band, that their actual take home pay after tax had been considered would be £1,465 higher than the old regime. I don't know if this is correct because I thought the whole point of the new regime was to put people off incorporating, but as all of the bulletins and articles all discuss the extra tax implication not the net take home position I thought it would be wise to get a second opinion. As dividends are no longer grossed up, surely this means that if you have a dividend up to the basic rate band of £34,900 (working on an estimated £8,100 for minimum salary), the net take home after tax is £43,000-£2,025 = £40,975 instead of the old regime which would have been £8,100 + £31,410 =£39,510. The £31,410 being the net dividend.

Am I missing something?

Replies (12)

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By johngroganjga
26th Oct 2015 08:55

I haven't reworked your figures but they can't be right because the whole point of the changes is that the effective rates of tax on dividends go up, while all other rates basically stay the same.

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By mdcallen
26th Oct 2015 09:08

cost to company

The net take home is higher, however the cost to the company is also higher (£43,000 versus £39,510).

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By cassierose1989
26th Oct 2015 09:10

I realise the rates of tax

I realise the rates of tax have gone up. But as you no longer need to gross up dividends the client can physically draw out £34,900 instead of £31,410. So even though the 10% tax credit no longer applies, the dividend drawn out I higher. I have provided my calculations below:

New Regime:

Salary                  £8,100

Dividend             £34,900

Total Income      £43,000

Lss: PA               (£11,000)

Less: DA               (£5,000)

Taxable Income   £27,000

Taxed @ 7.5%      £2,025

 

Old Regime:

Salary                     £8,100

Dividend                 £34,900                                (grossed up from £31,410)

Total Income          £43,000

Less: PA                (£11,000)

Taxable Income     £32,000

Taxed @ 10%        £3,200

Less:Tax Credit     (£3,200)

 

So based on the above (which closely follows the HMRC fact sheet calculation) the physical take home on the new regime is higher than the old one.

If this is incorrect, please let me know where I have gone wrong.

Thank 

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By stanbu
26th Oct 2015 09:20

Wrong comparison

If you are comparing take home pay then your first example should start with the same net dividend of 31,410 as in your second example, not a net (and gross) dividend of 34,900, as otherwise you are not comparing like with like. You will then see that the take home pay goes down.

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By cassierose1989
26th Oct 2015 09:30

I did do that calculation and I agree the take home is lower, however, if you no longer need to gross up then surely you need to do the calculation to show using the basic rate band to its full potential? As that is what we do now?

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Replying to Paul Crowley:
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By David Heaton
26th Oct 2015 12:02

You can't gross up to compare

In your old regime example, you have £31,410 to distribute.  There's then a notional gross-up and a notional tax credit.  But you still only have £31,410 cash for distribution, all other things being equal.

In your new regime example, you have assumed you can distribute the tax credit, but it's not there any more.  You only have £31,410 in cash to declare the dividend.  The 7.5% comes out of what would have been the net dividend under the old regime, not a grossed-up equivalent.  Your answer assumes you get the 10% back before you pay the 7.5%, which obviously would give you a better net result, but it's wrong, because the tax will come out of the cash, not the non-existent tax credit.

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By johngroganjga
26th Oct 2015 09:42

it is not necessary to check or re-perform your calculation to know that they must be wrong. When tax rates go up after tax retentions go down.  What could be simpler?

How much they go down, and whether and to what extent the reductions can be mitigated by planning, of course require careful calculation.

 

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By Ruddles
26th Oct 2015 09:45

Apples and oranges

For a meaningful comparison you need to consider the position of both the individual and the company. It should otherwise be fairly obvious that if you increase the amount of the cash dividend there is a fairly good chance that take home income will also increase.

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By johngroganjga
26th Oct 2015 09:52

As Ruddles says, if you put the same dividend into each of your calculations you will get the right answer.

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By pauljgoodman
26th Oct 2015 10:00

Ruddles is spot on

If you begin with a company cash pot of £50,000, the difference is that the company's cash pot is worse by the amount of the tax credit, £3,490, paid out under the new regime, and the individual is better of by £1,465, the difference being, surprise, the tax paid of £2,025

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By NotAnAcctantJustReading
26th Oct 2015 13:19

First rule of maths

If your calculations are right and the result doesn't make sense, you're asking the wrong question.

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Replying to spilly:
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By Portia Nina Levin
26th Oct 2015 13:21

GIGO

NotAnAcctantJustReading wrote:

If your calculations are right and the result doesn't make sense, you're asking the wrong question.

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