UK - Dividends - Tax Bands

Question

I am trying to figure out how much Dividend tax I will pay depending on my salary income.

E.g.

I can see the following Dividend Bands as of April 2016

╔═══════════════════╦══════════════╦═════════════════════════╦══════════╗
║     Tax Band      ║ Dividend Tax ║ Personal Taxable Income ║ Tax Rate ║
╠═══════════════════╬══════════════╬═════════════════════════╬══════════╣
║ Personal Allowace ║ £5,000       ║ Up to £11,000           ║ 0%       ║
║ Basic Rate        ║ 7.5%         ║ £11,001 to £43,000      ║ 20%      ║
║ Higher Rate       ║ 32.5%        ║ £43,001 to £150,000     ║ 40%      ║
║ Additional Rate   ║ 38.1%        ║ over £150,000           ║ 45%      ║
╚═══════════════════╩══════════════╩═════════════════════════╩══════════╝

Corporation tax from April 2015 is 20%

Does that mean the following is correct (for trying to draw over the personal allowance (£11k-£43k))?

Paying by Dividend

Income = £100

Corp Tax @ 20% = £20

Post-Tax Profit = £100 - £20 = £80

Dividend Tax @ 7.5% = £80 x 7.5% = £6

Take Home Pay = £80 - £6 = £74

Paying By PAYE

Cost to Company = £100

Income = £87.88

Employer National Insurance @ 13.8% = £87.88 x 13.8% = £12.12

PAYE Tax @ 20% = £87.88 x 20% == £17.57

Employee National Insurance @ 12% = £87.88 x 12% = £10.54

Take Home Pay = £87.88 - £17.57 - £10.54= £59.75

Cost to Company = £100

Answer 1

You have income, on which you pay income tax and NI contributions, and you have dividends. To find the tax bands, you add the dividends to your income, but you pay the dividend tax, no income tax, and no NI contributions.

My understanding of the calculation is this: All dividends until you reach your personal allowance are tax free. All dividends in the basic rate band pay 7.5%, all dividends in the higher rate band 32.5%, all dividends in the additional rate band pay 38.1%. Of the money where you should pay dividend tax (that is the money outside your personal allowance), the first £5,000 are tax free.

So the first thing to notice is that £5,000 of dividends are tax free. (Which doesn't make that much difference, 7.5% of £5,000 is just £375; the £5,000 tax free counts much more for people with huge income and huge savings).

The second thing is that your PAYE calculation is incorrect. For you to get £100 income, the company has to pay £113.80, and you receive £100 - £20 - £12 = £68. So your tax + NI cost is £45.80 out of £113.80, not £45.80 out of £100, which makes it 40.24% and not 45.80%. It doesn't change the fact that you pay a lot more by paying PAYE.

If your income is above £50,000 you have the added advantage that 20% are deducted first, so you can make more money while still staying in the basic rate band.

If you paid yourself (hypothetically) £100,000 dividends, there are some traps: First, if your adjusted net income (which includes dividends) is above £100,000, then for every two pound, you lose one pound in your personal allowance (the initial £11,000). If your adjusted net income exceeds £122,000, your personal allowance is completely gone. Second, it's not "£5,000 free, £33,000 at 7.5%". It's "£33,000 at 7.5 %, but you don't pay for the first £5,000", so it's "£5,000 free, £28,000 at 7.5%".

(This taking away your personal allowance means that an employee with a high salary effectively pays 60% tax for income from £100,000 to £122,000).