Dividends and tax credit healp please??

Blonde Accountant

Hi, Firstly I know that a company has to pay dividends on profits, but what if it is aninvestment company? Is there a way around this, so that it can pay dividends even though there is no profit?

Part 2 is: the directors have proposed a 5% dividend to pay, but how do you work out the tax credit payable? Is it 11%.

Finally, how does the company pay across the tax credit money to HMRC? Is it through the Corporation tax return.

Many thanks for taking the time to read this. Any help appreciated.

Monsoon

I can't answer about investment companies, however the following is general information:

Nobody pays the tax credit. It is notional. The tax that gets paid is the Corporation Tax.

Dividends can only be paid out of profit after corporation tax.
E.g. Profit of £10k, CT of £2k, retained profit of £8k that can be distributed as a dividend.

Dividends have to be distributed equally amongst the shareholders in the ratio of their shareholding.

Dividends get entered on the shareholder's personal tax return, if they get one. The tax credit is 10%. You work this out by multiplying the dividend received by 100/90.

E.g. Dividend received of £8k. Gross dividend £8888.88, tax credit £888.88.

Nobody pays the £888.88.

Pinkjo

Sorry to drag an old thread up, but I was hoping someone could offer me some advice regarding dividends/tax etc

Am I right in assuming the following:

Dividends are paid out of profits after corporation tax, so the Company would have paid 21% corporation tax on say £200k = £42k

Assuming the director is a higher rate tax payer, and they have been paid £158k dividends, they would have to pay 36.1% personal tax = £57,038 (as the 10% tax credit comes into play - which no-one pays)

So on £200k profit £99,038 is paid out in tax - almost half? Is this correct?

Monsoon

Pinkjo wrote: »

Am I right in assuming the following:

Dividends are paid out of profits after corporation tax, so the Company would have paid 21% corporation tax on say £200k = £42k

Yes

Pinkjo wrote: »

Assuming the director is a higher rate tax payer, and they have been paid £158k dividends, they would have to pay 36.1% personal tax = £57,038 (as the 10% tax credit comes into play - which no-one pays)

So on £200k profit £99,038 is paid out in tax - almost half? Is this correct?

200-42=158

very rough workings, assuming only dividend income, nothing else

6k tax free
36k basic rate (no additional tax on dividends)
158-6-36 = 116 at higher rate (lets ignore the additional rate of 50% which ups it further for now)

so 116 * 25% (which is the 32.5% tax after taking into account the tax credit)
£29000 tax to pay on the higher rate dividends.
ve
Total tax paid £42k CT and £29k personal £71k

Effective tax rate 35.5%

If the director is already a higher rate taxpayer before dividends obviously more tax applies.

Pinkjo

Thanks Monsoon - you are a star!

groundy

Dividends can not be taken from an investment company. There must be some level of trade otherwise any remuneration is subject to PAYE.