The Compound Effect of Corporation Tax & Personal Income Tax

Life would be far simpler if dividend Income was subject to tax at the same rate as earned income, and you got a personal tax credit for the corporation tax paid by the company before it declared your dividend.

Unfortunately, this is not how it works. Instead dividends are taxed at a lower rate than earned income, but there is no gain to you as you do not get full credit for the corporation tax paid by the company.

Are you a highly skilled expat Contractor? Would you like to maximise your contract income and work towards a visa extension or visa transfer? If so Commonwealth Contractors can help!

To discuss your situation with an experienced advisor call Commonwealth Contractors now on 0800 294 4388 or Submit your Details and we will get right back to you!

Rates of Tax on Dividends & Earned Income

The tables below show the rates of tax on dividends and on earned income (Tax rates on Earned income and Interest (bank interest, bond coupons) for 2015 / 2016)

Income Tax Rates (2015/2016) for someone under 65 earning under £100,000 per annum

Description

Rate of Tax

Paid on Earnings

Personal Allowance 0% £0 – £10,600
Basic Rate 20% £10,600 – £42,385
Higher Rate 40% £42,385 – £100,000

 

Income Tax Rates (2015/2016) for someone under 65 earning over £121,200 per annum

Description

Rate of Tax

Paid on Earnings

Personal Allowance 0% N / A
Basic Rate 20% £0 – £31,785
Higher Rate 40% £31,785 – £150,000
Top Rate 45%% Over £150,000

 

UK Tax Rates (2015/2016) on Deemed Dividend Income for someone under 65 and earning under £100,000 per annum

Description

Rate of Tax

Paid on Deemed Dividend

Personal Allowance

0% £0 – £10,600

Basic Rate

10% £10,600 – £42,385

Higher Rate

32.5% £42,385 – £100,000

UK Tax Rates (2015/2016) on Deemed Dividend Income for someone under 65 and earning over £121,200 per annum

Description

Rate of Tax

Paid on Deemed Dividend

Basic Rate

10% £0 – £31,785

Higher Rate

32.5% £31,785 – £150,000

Additional Rate

37.5% Over £150,000

**If you have earned income / interest as well as dividend income, it will affect the rate payable. You only have a single basic / higher rate allowance for use with all types of income.

Tax Credits on Dividends

The above table details the tax on ‘Deemed Dividend Income’.

If you receive a dividend from a UK company, it carries with it a tax credit (in partial recognition of the corporation tax paid by the company).

Dividend Paid to You

Tax Credit

Deemed Dividend Income

Cash (£) £1 £0.11 £1.11
Value (%) 90% 10% 100%

** Figures are rounded to the nearest penny. Actually the £0.11 recurs. For full accuracy start with £1/0.9)

Tax Paid – Basic, Higher & Top Rate Taxpayers

Basic Rate Taxpayer receiving a £1 cash dividend and £1.11 deemed dividend income

Tax Liability = 10% of £1.11 = £0.11

Tax Credit = £0.11

Tax Due = None (i.e. the tax liability is covered in full by the tax credit)

Higher Rate Taxpayer receiving a £1 cash dividend and £1.11 deemed dividend income

Tax Liability = 32.5% of £1.11 = £0.36

Tax Credit = £0.11

Tax Due = £0.25

Top Rate Taxpayer receiving a £1 cash dividend and £1.11 deemed dividend income

Tax Liability = 37.5% of £1.11 = £0.41625

Tax Credit = £0.11

Tax Due = £0.30625

Combined Effect of Corporation Tax & Personal Tax

N.B. All these tables use a corporation tax rate of 20%. This is the main rate in 2015-16;in earlier years it was the Small profits rate (payable on profits up to £300,000 pa;higher levels of profits attracted higher rates of corporation tax, but by 2014-15 the difference between the main rate and the Small profit rate was only 1%)

Breakdown

Basic Rate Taxpayer

Higher Rate Taxpayer

Additional Rate Taxpayer

Pre Tax Profit

£100.00 £100.00 £100.00

Corporation Tax Rate

20% 20% 20%

Post Tax Profit paid
as Dividend

£80.00 £80.00 £80.00

Deemed Dividend Income

£88.88 £88.88 £88.88

Tax Credit

£8.88 £8.88 £8.88

Tax Rate

10% 32.5% 37.5%

Tax Bill

£8.88 £28.89 £33.33

Dividend After Paying
Basic Rate Tax

£80.00 £59.99 £55.55

For those close to the £150,000 top rate threshold, and those close to the £100,000 gross earnings point at which they loose their personal allowance (and thus suffer in effect a 60% marginal income tax rate), the ability to structure earnings as dividends is particularly valuable as the deemed dividend income is less than the underlying corporate profits.

For a company paying corporation tax at the small company rate, pre-tax of 20% profits are c12.5% higher than deemed dividend income. For a company paying corporation tax at the Large company rate of 25%, profits are c20% higher than deemed dividend income.

Find out More

To find out more about Commonwealth Contractors call now on 0800 294 4388 or Submit your Details and we will get right back to you!

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