The real question is what is the maximum dividend I can draw without hitting one of many tax bands, there is not just the 40% band to consider now, but the Higher income child benefit charge (HICBC) which affects the earner in a household with income over £50k. The limits at which each of these is reached is as follows (for 2014/15):
- 40% tax band – £41,865
- HICBC lower limit – £50,000
- HICBC upper limit – £60,000
For many owner managers drawing the basic directors salary this year of £660pm, this means the available band for other income including dividends is £33,945, £42,080 and £52,080 respectively. Cash dividends are paid net of a 10% basic rate tax deduction so in terms of cash drawn the maximums are:
- 40% band – £30,550
- HICBC lower – £37,872
- HICBC upper – £46,872
Including the salary this means the average cash which can be drawn monthly is as follows (although if course dividends can only be voted when there are funds available to pay them and would not normally be the same every month):
- 40% band – £3,205
- HICBC lower – £3,816
- HICBC upper – £4,566
So what are the tax implications if these bands are exceeded:
- 40% band – For every £1 cash drawn 25% will be paid in additional tax
- HICBC lower – any child benefit paid will be recouped between £50-£60k so at £1k over 1/10 of the child benfit will be recouped, £2k will be 2/10 etc
- HICBC upper – all of the child benefit will have been repaid, and upto the £150k 45% band the same 25% for every £1 drawn will stand
There are many other factors which may affect this calculation including other income sources so this will only give a basic indication of the values involved. This may not apply to your situation, so you should seek professional advice before taking any steps based on the contents. If you would like advice in this or other areas feel free to call. Alastair Wood, AW Accounting, Gravesend, Kent – Accountants who “speak your language”