Tax on dividends?

Question

I am looking to start my own limited company but not really sure how viable it is going to be as far as saving on tax is concerned. I expect to make anual profit of £60 K. So the corporation tax on that will be 22% so I am left with £46.2 K. Now if I wanted to take all this money out as dividends how much tax would I have to pay on this if I have a minimum rate wage?

Answer 1

The current taxation of companies and dividends is a great area to exploit (within the legislation)

The rate of UK corporation tax is 20% not 22%.

If you were a client of my firm I would be looking to pay you a combination of salary and dividend.

I'd probably put you on a low salary of say £8000 which on an annual basis would mean the company would pay approx £1120 in paye deductions throughout the year.

The salary however becomes an allowable deduction against profits and therefore reduces the overall corporation tax bill by £1600 (£8k x 20%).  Its actually a bit more cos theres an additional decution for employers national insurance.

On this basis the £60k profit would be reduced to £52k and the tax @ 20% is £10400.

The retained profits would therefore be £41,600.

Dividends are tax free on the recipient unless the individual is a higher rate taxpayer.  In 2008/09 you would be able to earn total income of £41435 without hitting the higher rate tax bracket.

Remember on my basis you have already received £8k in salary which means you'd only be allowed £33435 in dividends before incurring tax.

Any divi's taken above the higher rate tax threshold basicaly costs you 22.5% in tax.

This is a pretty technical area and you need some proper advice before just going ahead willy-nilly.

Are you married?  Can you wife have a share and therefore receive divis in her own name?

The tax office recently lost a landmark case (Arctic Systems) whereby a man and wife limited company split the divis.  So currently that basis is still okay.

Apologies for the long winded reply but its complex stuff!