Tax liability - PAYE & Ltd Bus

[richb330]

Hi, i'm looking for some information on dividend payments.

I am full time employed (PAYE) at just over £50kpa. Just over a year ago I setup a Ltd company to provide my brother with IT support for his business. Profits obtained by the business only total around £2.5k for the year. I understand that profits created by the business are taxed at 20% but what about dividend payments. Are these really taxed at 40% through self assessment, therefore a 60% tax liability on my second job?

My wife doesn't work, she looks after our small children and we claim what child benefit we can get - is there anyway to use her tax free allowance if my calculations are correct?

The tax liability seems excessive, could someone please clarify for me?

Thanks in advance.

 

[David Griffiths]

The company pays corporation tax at 20% as you say.

The net dividends would be free of tax to a basic rate shareholder. For a higher rate 40%) shareholder there would be a tax charge of 25% of the actual amount received. Without going into the arithmetic, this makes up the difference between basic and higher rates of tax on the grossed up dividends.

 

[richb330]

Many thanks for your prompt reply.
To confirm, the tax liability on dividends for a higher rate tax payer is 25%, after 20% corp tax, therefore I pay 45% tax on money I make in the business that is transferred through dividend payment?

 

[AndrewEardley]

Why don't you employ your wife, pay her a "salary" of £50 per week (which equates roughly to the £2.5k profit). No Tax/NI will be due if its her only job

You don't need to run PAYE as below threshold, negates corp tax as no profit, and gets the money out

 

[Tom McClelland]

Many thanks for your prompt reply.
To confirm, the tax liability on dividends for a higher rate tax payer is 25%, after 20% corp tax, therefore I pay 45% tax on money I make in the business that is transferred through dividend payment?

No, you pay a total of 40%. The personal tax on the dividends is 25% of the 80% that you can pay as dividends.

Profit = £100
CT = £20 (20%)
Dividend = £80
Personal tax = £20 (25% of £80)

Total tax = £40 (40% of £100)