Tax Year End Dividend Planning

We're getting close to the end of the 2010-11 tax year and thoughts turn to planning for the year end.

We are often asked how much can I draw in dividends before paying tax? That does depend on the client's overall circumstances e.g. savings income, salary, property income. Based on the assumption that a company owner draws a salary equal to the annual tax free allowance, has no other income except the dividends from their company, then they could earn a maximum of £37400 in 2010-11 before being liable for any additional personal tax.

The mistake often made is to draw £37400-00 as cash dividends, not realising a dividend contains a notional tax credit which increases the amount for income purposes. In cash terms, the limit is 90% of your available income, in other words if you had a salary of £6475 you could take £33660-00 in actual dividends. Additional dividend income is taxed at a rate of 25% or 36% depending on whether they take you into the 40% or 50% tax band.

If you're not sure about your own circumstances, give Graham a call on 01235 868888.