40% tax bracket is £36000?

[Brian Turner]

Just thought I'd better check out what the actual higher rate of income tax was for working out dividends:
http://www.direct.gov.uk/en/Nl1/News...2008/DG_072925

I actually thought the 40% rate was around £40,000-£43,000 - so was pretty surprised to see it at £36,000.

I guess I've been making a simple mistake of thinking 40%=£40 at some point and never got around to correcting myself.

Quite lucky really, as I thought I was under paying myself with dividends, but it looks as though I had myself a lucky escape - I could have been paying more and fallen foul of paying a lot of tax by accident!

[monaghan]

That's the problem, £36K is not a lot for "us lot down south". A single person (assuming traditional 3*salary calculation) couldn't get a mortgage for even a basic 1 bed house in our town until they are well into the high rate tax band.

High rate tax used to be for the rich, now it's for the average man in the street

[Peter W]

The trap with dividends and higher rate tax is that the amount you are actually taxed on is the dividend you receive, PLUS the 10% tax credit that is notionally attached. So, you need to multiply your dividend by 10/9 to get the taxable income figure.

[Steve-H]

Hi Brian

The figure of £36,000 is after your personal tax allowance so add the two together to get the point where you start paying 40%. If you are on £5435 personal allowance add £36000 means you can earn total income of £41435 before you hit 40%.

[Brian Turner]

Ahhh...thanks for that, Steve. That makes things clearer.

[Startup03]

Interesting. 41435 still doesnt sound like that much more for your options. I hear that people are still struggling that are getting more than that depending on where they live...ahem London is a bit steep.

[frauke]

The trouble with "earning" more money as a salary

- is the more you earn, the more you pay in taxes, so the less you take home!

Ignoring tax credits -

A typical Company Director/shareholder will taking home during the year £36,000pa (£5400 salary £30,600 dividends)

A employee earning £36,000pa - take home would be £25,200! That £10,800pa less to live on - thats what goes to the Government.

For an employee to take home the same amount, thier employer will have to pay them a salary of at least £48,000 - an extra £12,000pa! But it will actually cost the employer £53,500 by the time you've added the extra Employers NIC contribution of £5,500!

Isn't it any wonder that the Government wants to stop directors/shareholders from doing this.

[Steve-H]

It is usually more tax efficient to be a director/shareholder than a salaried employee.

One point not mentioned in the above calculations is the corporation tax the company pays before paying the dividend to the shareholder. Dividends come from profit after corporation tax so it is not as attractive as it looks but still considerably better than paying large sums of National Insurance.