5

I live in UK, I have a day time job where I earn around £26,500 per year,

I am also running my own limited company, and I just received a dividend of £60,000

My accountant told me that I will need to set aside approximately £16,500 for additional tax for dividends.

So it will leave me with £43,500 after tax.

I have used various online calculators, it always seem to show a lower tax to be paid on dividend, e.g.:

enter image description here

(Source: https://taxscouts.com/calculator/dividend-tax/)

I am also under the impression that my accountant did not really make it very tax efficient (dividend amount). It appears, according to my limited experience with UK taxation, that it would be more tax-efficient to take a lower dividend, e.g. £50,000

Is the predicted £16,500 tax to be paid for dividend calculated by my accountant correct? Thank you.

  • Maybe the accountant was being helpful and instructing you to also save their fee, such that if £12975 goes to HMRC, they get £3525, and you have allocated your funds perfectly? – gktscrk Mar 11 at 19:19
6

My calculation is £13,475 for the dividend tax amount. I don't understand why your accountant has given you a figure quite as high as £16.5k. Here are my workings…

First, income tax – as this affects how your dividends are taxed subsequently:

  Total salary  Personal allowance    Taxable salary  Tax rate  Amount of tax
        26,500              12,500            14,000     20.0%       2,800.00

So the income from your day job uses up £14,000 of your Basic Rate band of £37,500 (i.e. the band from £12,501 to £50,000 of taxable income).

Therefore you have £23,500 of this band left, after your salary is taken into account first.

We then take this into account with the dividend calculation. You also have a separate £2,000 tax-free personal allowance for dividends.

Total dividend   Amount falling in         Personal   Tax rate  Amount of tax      
                   basic rate band        allowance
        60,000              23,500            2,000          -           0.00

                                         Taxable at 
                                         basic rate
                                             21,500       7.5%       1,612.50                                  
                 Remainder taxable            
                    at higher rate
                            36,500                       32.5%      11,862.50
                                                                    ---------
     Total tax payable on dividend                                  13,475.00

(source – for tax year 2019/20).

You are using both tax-free personal allowances to the full extent:

  • income tax personal allowance of £12,500 through your PAYE job
  • dividend personal allowance of £2,000 through your limited company.

so I don't think there is a way for it to be more tax-efficient to take a lower dividend. If anything – if it were possible to arrange it this way – it would be more tax-efficient to take a lower salary, since the tax rates on dividends are lower than the tax rates on salary.

Unless there are other complicating factors such as Child Benefit (which you do not mention), this seems a fairly tax-efficient arrangement to me.

Of course, if you wish to make pension contributions this is tax efficient as it can reduce your taxable income, so you're not paying as much tax at the higher rate.

Hat tip to comments from Josh Griggs and TripeHound that have improved this answer a great deal – thank you.

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  • 3
    Doesn't the high dividend take OP into the higher tax bracket though? Some of it will be taxed at 7.5% but the higher rate will kick in as well. – Josh Griggs Mar 9 at 13:27
  • @JoshGriggs thanks – have improved answer based on your input. – marktristan Mar 9 at 14:35
  • I think the job is independent of the limited company, so shifting money from salary to dividend wouldn't be possible, it's more a question of timing taking the money out of the company. – GS - Apologise to Monica Mar 10 at 11:16
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    @mootmoot But for every additional £1 in salary (taxed at 20p), a further £1 of the dividend would be taxed at 32.5% instead of 7.5% (a 25p difference) – marktristan Mar 11 at 13:44
  • 1
    @marktristan As (I think) I understand it, the £2,000 within the Dividend Allowance still "consumes" part of the basic-rate band (it's just that that part is taxed at 0% instead of 7.5%)... see "What are the rules on dividends?" at the top of page 3 of this PDF. This would mean only £21,500 is taxed at 7.5% and the remainder (£36,500) at 32.5%. I make total tax on dividends £13,475, for a total tax of £16,275. – TripeHound Mar 11 at 14:06
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Notes: (a) I am not an accountant nor a financial adviser; this is not financial advice. (b) I had all but written this answer when Mark edited his answer to include my correction regarding the Dividend Allowance. As I hope my "visual" representation may be useful addition, I decided to post (a slightly modified version) anyway. But the main credit should go to Mark.

As marktristan's answer now incorporates, the £2,000 within the Dividend Allowance, although taxed at zero percent, still "consumes" part of the Basic Rate Band1. The following visual representation may help show this (notice how the £2,000 band is within the Basic Rate Band):

                            -----------------  --------------------------




         Higher Rate Band                      £36,500 @32.5% = 11,862.50


                             Dividend Income
                                (£60,000)

£50,000 ------------------                     --------------------------


                                               £21,500 @ 7.5% =  1,612.50

         Basic Rate Band
            (£37,500)                          --------------------------
                                                £2,000 @   0% =      0.00
                            -----------------  --------------------------

                                               £14,000 @  20% =  2,800.00
                             Regular Income
£12,500 ------------------     (£26,500)       --------------------------

        Personal Allowance                     £12,500 @   0% =      0.00

     £0 ------------------  -----------------  --------------------------
                                               TOTAL TAX       £16,275.00
                                               --------------------------

Crucially, though, Mark is correct in stating that to reduce overall tax, you want to reduce your normal salary and increase the amount paid as dividends2.

If the same overall total (£86,500) is maintained, you will always be paying the higher-rate of 32.5% on £36,500 of dividends3, so we can "ignore" that. The next highest rate of tax is the £14,000 of ordinary income taxed at 20%. If we reduce regular income by £14,000 (and increase dividends correspondingly), your overall tax bill will be reduced because you will now only be paying 7.5% on that £14,000:

                            -----------------  --------------------------




         Higher Rate Band                      £36,500 @32.5% = 11,862.50





£50,000 ------------------   Dividend Income   --------------------------
                                (£74,000)



         Basic Rate Band                       £35,500 @ 7.5% =  2,662.50
            (£37,500)



                                               --------------------------
                                                £2,000 @   0% =      0.00
£12,500 ------------------  -----------------  --------------------------
                             Regular Income
        Personal Allowance     (£12,500)       £12,500 @   0% =      0.00

     £0 ------------------  -----------------  --------------------------
                                               TOTAL TAX       £14,525.00
                                               --------------------------

Switching more than £14,000 from regular income to dividends will not give any more benefit2: all that would happen is that increasing amounts of the £12,500 within the Personal Allowance would come from dividend income instead of (in the examples above) all coming from regular income.


1 My original source for "income within the Dividend Allowance consumes the Basic Rate Band" comes from the top of page 3 of the fact-sheet Savings and dividend tax [PDF], produced by the Low Income Tax Reform Group, which states:

Like the personal savings allowance, income that is covered by the dividend allowance still counts as taxable income and therefore still uses up the basic rate band or the higher rate band.

It is also confirmed on the Tax Calculator page that mootmoot mentioned in comments (my emphasis):

Thanks to the dividend allowance, there is no tax to pay on the first £2,000 of dividends (this is why the ‘total taxable income’ on the calculator reduces your liability by this amount). Importantly, the dividend allowance sits within your existing income tax bands when it comes to working out your overall tax liability.

2 In switching money between normal income and dividend income, I am only considering income tax effects. There may also be an impact on National Insurance (either employee's NI, as paid by you, or employer's NI, as paid by the company), or other effects, about which I do not know enough to comment.

3 Actually, this would not be true if we switched a lot of money from dividends to regular income. However, doing so would replace higher-rate dividend tax at 32.5% with higher-rate income tax at 40% so would have a negative effect.

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