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Income tax and planning

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From 6/4/14 there continue to be 3 rates of income tax on dividends: 0% on grossed up dividends up to the HR tax band (£41,865)

Effective tax rate of 25% on net dividends taken in between £41,865 and £150,000. [effective gross tax rate is 22.5%]

Effective tax rate of 30.56% on net dividends taken above £150,000. [effective gross tax rate is 27.5%]

Tax rates on salary/wages continue to be higher of course: 40% on earnings between £41,865-£150,000 and 45% on earnings above £150,000. Don’t forget about NI also of course – no NI is payable on dividends but 25.8% NI (employers and employees) is payable on earnings in between £7,956 and £41,865 (then it reduces).

In addition, the basic personal allowance for income tax will be reduced gradually to nil for individuals with net incomes of above £100,000. The amount of the allowance will be reduced by £1 for every £2 above the income limit. The effect is to give a 60% marginal income tax rate on income between £100,000 and £118,880 using the current personal allowance amount.

Taxable Income

Marginal Rate

£100,000 to £118,880

60%

£118,881 to £149,999

40%

£150,000 +

45%

 

So that contractors earning above £100k will be hit with additional tax. 

We would encourage clients to consider speaking to Philip Lee (or your Financial adviser if you use someone else) about increasing contributions into your pension fund instead of taking dividends when your total income (gross salary and net dividends) is about to exceed £100k in tax year. You can also consider shifting investments to your spouse if they are earning less than £100,000 to use their lower rate tax band (40% if higher rate) instead of your potential 60% rate.  

To assist with simple dividend planning:  

  • Dividends should always be paid out in relation to the shareholdings in your company.
  • You must leave sufficient funds in the company to make good its liabilities to VAT, tax, accountancy fees etc before taking a dividend.
  • Remember you pay personal income tax on all grossed up income e.g. salary/dividends etc based on income for a given tax year (i.e. 6 April to 5 April) as opposed to receipts in the company's financial year.

Article Source: Graeme Bennett ACMA MBA of Forbes Young

Source: Graeme Bennett ACMA MBA of Forbes Young

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