Still Dont understand Dividend Tax credit system??

Question

Still Dont understand Dividend Tax credit system??
Hi can you help clarify how I would work out my income and tax liability as a director or a ltd co,

If I were to invoice for 5k a month and trade through my own LTD company –

my turnover for year is 60k
expenses for year are £4800
I pay myself a salary of 5225k
So net profit before tax is £49,975
Ctax – 20% = £9995

Dividend left for me is £39,980

£39,980 how would I work out the tax I need to pay on the dividend as there are brackets

10% below £34,600 and 32.5% above £34,600..

Can you help me understand the tax credit system -

how much dividend tax do I pay ?
How did you work it out?
Is my £5225 salary taken into consideration and added to dividend to work out final tax bill?

Answer 1

With a profit of 40k, I am surprised you don't feel the need to have an accountant.... errors in tax can be costly, and let's be fair, advice on YA is not always reliable.

Answer 2

ok, first off the dividends payable to yourself would be 90% of £39980 which equals £35982, this accounts for 10% notional tax £3998 deducted which is taken into account within the corp tax calc as far as im aware.

with regards to the additonal tax payable if you fall into the higher rate tax band including your salary and any other income, only then do you need to pay the extra 22.5%

it works out like this for 06/07

salary £5225
Dividend (gross) £39980

total income £45205

less PA £5225

taxable amount £39980

2150 @ 10% = 215
31150 @ 10% = 3115 because dividends its 10% basic rate
6680 @ 32.5% = 2171 because dividend only 32.5% higher rate due
Total tax due 5501

less 10% notional tax duducted of £3998 leaves £1503 additional tax to be paid
hope this clears it up

Answer 3

Paul has covered all the individual calculation but has worked on a lower dividend than is necessary.

If you draw the whole £39,980 out as a dividend then this is treated for your own income tax purposes as a gross dividend of £44,422 less a tax credit of £4,442.

I'll leave it to to recalculate at this figure.