Property Empire (Part 2)

Continuing from last week I touched on the various ways of getting the best out of a company (if you decide to go down that route). This week we'll get on to part two which is

2. Dividends

If a company 'distributes' its profits by paying dividends, it cannot get a deduction from its taxable profits for doing so; so the sums are different. Because dividends are paid out of profits already charged to corporation tax, they come with a 'tax credit' that can be offset against any income tax due from the shareholders who receive the dividend. The sums can be complicated, but here goes;
If the company pays a dividend in cash (say £900.00), you have to add one ninth (£100.00) to it to arrive at the taxable amount, so in this case you are treated as receiving £1,000.00 of taxable income, which includes a 'tax credit' of £100.00. If you don't pay tax at the higher rate, the tax credit is enough to cover the income tax due, so you don't need to pay any further tax.
If you are a higher rate taxpayer, you will pay income tax at the 'dividend rate' of 32.5% on your dividend of £1000.00, giving a tax bill of £325.00. From this you can deduct the tax credit of £100.00, so you have to pay a further £225.00 in income tax.
It's much simpler to look at it like this; a higher rate tax payer will pay income tax of £225.00 on a dividend of £900.00....that's 25%

If you can't wait to read parts 3 to the end, please email me at helpdesk@taxrefundmoney.co.uk with subject matter "TAXFACTS 7" or call 0800 298 9358 and we'll send you the complete article either by email, on a fax number or by post.