Our external accountant has told our Directors that the maximum tax efficient amount payable in dividends is £40,000per annum. I cannot recall seeing legislation to that effect or public outcry. If we, should we go over that amount, he tells us we will end up paying tax at a rate of 52.5% as opposed to 32.5%.
Where does he get his line of arguement from?
This is a new one on me
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I think he has got his snickers in a twix
Assuming you have no other income, c £40k plus a small salary will use up your basic rate band and you will have no further personal tax liability.
Go over that and you will owe higher rate tax on the dividends over the threshold. There is no legislation to say you can't do this, but you personally will have to pay 1/4 of the net dividend in higher rate tas.
Effective tax rate - 21% ct paid by company plus an extra 25% of the net dividend. This works out atan effective rate of a tad over 40% of the original amount the company had before corporation tax. So if the company had £10k, corp tax of £2100, net divi £7,900, higher rate tax £1975. Total £4075.
I suspect the other accountant was overlooking the tax credit?
Corporation Tax rate?
Could it be that the company is liable to corporation tax at the higher rate?
Or perhaps his point is that £4,075 tax is 51.6% of the £7,900 dividend?
It does seem however that the accountant is (quite correctly) looking at the combined effect of corporation tax on the company and income tax on the shareholder.
David
Dividends & salary
Assuming the company is the only or main source of income the optimum position is to pay a director's salary of £475 per month = no NIC & still qualify for Basic State pension.
Net dividend per month = £2,805 x 12 = £33,660 net = £37,400 gross [= limit of Basic rate band].
This leaves £775 [ Personal allowance £6,475 less Salary £5,700] to use against bank interest & other small dividends received.
If there is an incorporation of a business involved there should have been a Goodwill figure transferred to the company by the director[s] which can be used for "drawings" above the dividends until exhausted.