Personal tax calculations and payments on account
If you are a director then you will be obliged to file a tax return each year, and will need to pay any tax that is due thereon as a lump sum on 31st January. You normally have to wait for your contractor accountant to calculate your tax for you, but if your income is a simple mix of salary, bank interest and dividends then it’s easy to estimate the amount yourself.
Dividends are tax free in the basic rate band, and then taxed at 25% of the net value in the higher rate band.
To work out the amount of your dividends that fall into the basic rate band you simply take the higher rate limit of £41,450 (for 2013/14), reduce by any other gross income, then divide by 10 and x by 9.
So £41,450 less a salary of say £12,000 and gross bank interest of £400 leaves £29,050 /10×9 = £26,145.
If you’ve taken dividends of £40,000 then deduct the basic rate amount of £26,145 to leave £13,855. Your liability will be 25% of that, so £3,463.75.
This will be payable in the January following the end of the tax year – so for the year to 05/04/2014 the tax will be due by 31/01/2015. HMRC will pay you interest if you pay early, and probably at a higher rate than your bank would!
If you have income exceeding £100,000, benefits in kind, self-employment, foreign income, rental income, other dividend income, capital gains etc. then the calculation gets more complex, so discuss with your contractor accountant if you want an early estimate of your liability.
Bear in mind that your liability may also be increased if you have a student loan to repay, or you have Child Benefit that is being reclaimed.
Payments on account – a word of caution
What catches many people unaware is the additional tax that may be due because of payments on account, especially if it’s their first year in the self-assessment system. You may have to pay not only the tax due on your higher rate dividends as above, but also a 50% payment on account. If your liability is already significant, this can increase it further and come as quite a shock if you don’t find out until the last minute. A further 50% is then also due in July of the same year. These payments will be offset against your liability next year, but can still cause a major cash-flow issue in the meantime.
This blog has been prepared by Intouch Accounting. While we have made every attempt to ensure that the information contained in this blog has been obtained from reliable sources, Intouch is not responsible for any errors or omissions, or for the results obtained from the use of this information. This blog should not be used as a substitute for consultation with professional accounting advisers. If you have any specific queries, please contact Intouch Accounting.