Tax on dividends from a limited company when a higher rate taxpayer

Question

I am a higher rate taxpayer and want to do some work on the side. I've already secured the work but I am now wondering if I should use a personal company or not. What I do not understand is the tax on dividends.

In this website (https://www.gov.uk/tax-on-dividends), when they say higher rate taxpayer, does this refer to my current salary or how much dividends I pay out to myself?

If I pay myself dividends above £2,000 and I am a higher rate tax payer, does this mean any dividend above £2,000 is taxed at 32.5%?

Answer 1

You are classified as a higher rate taxpayer when your total income exceeds the threshold for basic rate income tax.

So in short, yes, if you already exceed the basic rate band through PAYE (salary), then yes your dividends will be taxed at the higher rate of dividend tax – 32.5%.

However - you also have a £2,000 Personal Allowance for dividends, separate to the income Personal Allowance, so the first £2k of dividends will be tax free.

Ultimately, once you are into the higher rate income tax band, every £1 of dividend is taxed less than £1 of salary.

Answer 2

In addition to the answer you received, don't forget to make use of pensions to reduce your taxable income. If you're a sole proprietor, you can pay into a SIPP. If you form a company, the company can pay into a personal pension (such as a SIPP) and save NI and income tax. This might avoid you from being a higher rate tax payer.