Brought to you by
taxinsider

Tax Insider publishes monthly newsletters and reports.

Save content
Have you found this content useful? Use the button above to save it to your profile.

Tax Insider Tip: Pay Dividends Up To Basic Rate Limit Each Year

13th May 2015
Brought to you by
taxinsider

Tax Insider publishes monthly newsletters and reports.

Save content
Have you found this content useful? Use the button above to save it to your profile.

The example in Tip 67 illustrates one of the benefits of dividends, in that no additional tax is payable until the taxpayer’s income exceeds the basic rate limit. Above the basic rate limit and up to the higher rate limit tax is payable on the gross dividend at a rate of 32.5%. Above the higher rate limit, gross dividends are taxed at 37.5%. The tax payable is reduced by the tax credit attached to the dividend.

To minimise the overall tax payable on profits over a number of years, consider extracting profits as dividends up to the basic rate limit each year. This way it is possible to extract profits free of income tax (and NIC).

Example:
Ann has her own company. She is the sole director and shareholder.

In year 1 she makes profits after tax of £50,000 and in year 2 she makes profits after tax of £65,000.

If each year she extracts dividends up to the basic rate limit no additional tax will be payable.

For 2014/15 it is possible to have income of up to £41,865 (personal allowance of £10,000 plus basic rate band of £31,865) before paying higher rate tax. Up to this limit there is no additional tax to pay on dividends as the liability at the lower dividend rate is offset by the associated tax credit.

If Ann only pays a dividend and does not draw a salary, she can pay gross dividends of £41,865 before having to pay out any tax. This means Ann can pay a net dividend of £37,678 (£41,865 x 9/10). She leaves the remaining profit in the company, extracting a dividend up to the basic rate limit the following year.

Ann may, however, wish to draw a small salary to preserve her state pension entitlement (see Tip 65). This will reduce the amount she can withdraw by way of dividend before paying any further tax.
For example, if she pays herself a small salary of £7,000 to preserve pension entitlement, she can pay a gross dividend of £34,865 (£41,865 - £7,000), which equates to a net dividend of £31,378, without having to pay out any tax.

This is a sample tip taken from our 136 page guide:
101 Ultimate Tax Strategies Revealed.

Click here to receive a free copy of this tax saving guide today!

Tags: