Tax-free dividends for 2006/7
As a shareholder/director, you take most of your money out of the company as dividends. As the personal allowance has increased this year, how much can you now take out without paying any tax?
Dividends
The amount of tax due on the dividends you receive from your company depends on the level of your other income received in the same tax year. The income tax rates that apply to dividends in 2006/7 are:
| Taxable income (your total income less the personal allowance of £5,035 for 2006/7) | Tax rate |
| On first £33,300 | 10% |
| Above £33,300 | 32.5% |
Tax credit. However, as your company pays you dividends out of profits on which it has already paid (or is due to pay) tax, dividends come with a 10% credit so the dividend is not taxed twice. You can offset this tax credit against any tax that may be due on your dividends. So when working out your dividend income, you need to add the tax credit to the dividend you’re actually paid.
Basic-rate taxpayer. If your taxable income in 2006/7 is less than £33,300 then you will have no tax to pay on your dividend income because the tax liability is 10% - the same amount as the tax credit.
Higher-rate taxpayer. You pay a total of 32.5% tax on dividend income that falls above the basic rate income tax limit (£33,300 for 2006/7). But because the first 10% of the tax due on your dividend income is already covered by the tax credit, in practice you only pay 22.5% tax on the gross dividend. This works out as 25% of the dividend you actually receive.
Maximum tax-free. So, if you have no other income, the maximum dividend you can actually receive from your company in 2006/7 without paying any tax is £34,502:
| Cash dividend received | £34,502 |
| Tax credit (dividend x 1/9) | £3,833 |
| Gross dividend | £38,335 |
| Personal allowance | £(5,035) |
| Taxable income | £33,300 |
| Tax (£33,300 x 10%) | £3,330 |
| Offset by tax credit (restricted to the tax due) | £(3,330) |
| Tax payable | £Nil |
Tip: Dividends and salary
You can actually receive more (£35,005) tax-free from your company by making sure you take a small salary of £419.58 a month (£5,035 a year) to cover your personal allowance with the rest as dividends.
| Salary received | £5,035 |
| Dividend received | £29,970 |
| Tax credit (dividend x 1/9) | £3,330 |
| Gross dividend | £33,300 |
| Personal allowance | £(5,035) |
| Taxable income | £33,300 |
| Tax (£33,300 x 10%) | £3,330 |
| Offset by tax credit | £(3,330) |
| Tax payable | £Nil |
Tip. By taking a salary of £419 a month in the tax year to April 5, 2007, not only can you take out more from your company tax-free but you can also retain your entitlement to the state pension without having to pay any tax or National Insurance. If you receive a salary of between £84 and £97 a week, you don’t pay any NI but you receive credits for the State Second Pension. Just make sure you issue yourself payslips and a P60 to prove that you received this. (Something your accountant can help with.)
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