Sunday, 5 September 2010

All about UK Dividend Tax

When a company profits (income - expenses > 0), that money can be re-invested in the business (Retained Earnings) or paid as a dividend to the company shareholders.

When Company C1 pays dividend, should it pay tax?

Corporations should pay Corporation Tax on their profits which is now 20%. This tax is paid before paying any dividend!

When shareholder S1 receives dividend, should it pay tax?

If the shareholder's overall dividend income is between £37,400 and £150,000, then that shareholder has to pay 32.5% tax on his dividend. If the dividend income is less than £37,400 then 10% is the tax.

hmm, if £1000 is your Company's profit you have to pay £200 for corporation tax. So on the remaining £800, you have to pay 10% of it (assuming you're the shareholder) for shareholder dividend which would be £80. Therefore, at the end what you will get is £720 which means overall you have paid is 28% tax whereas if that profit was to be paid via PAYE, then 40% tax should have been paid assuming the shareholder's gross income is over £37,400.

So the tax saving you would make in this way would be 12% on your income above £37,400.

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