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Maximise the use of your basic rate tax band (UK limited companies)

Written by: Keith Silman

Article Overview: This article focusses on director/shareholders of small UK companies and illustrates how to maximise the use of your basic rate tax band.

Maximise the use of your basic rate tax band (UK limited companies)

If you are a director-owner of a UK limited company you have the opportunity to extract profits from your business in a way that minimises your tax bill, especially if you keep the amount within the basic rate tax band.

Dividend tax planning is usually done in February prior to the end of the tax year to give you the time to complete all the necessary documentation. At this stage in the tax year you are also likely to know how much income you will receive in the tax year from all sources and therefore how much of your basic rate band you have available to use.

As dividends have a 10% tax credit attached, this tax credit can be used to effectively pay your personal tax liability on the dividend if it all falls within your basic rate tax band.

When calculating your taxable income, you have to "gross up the dividend" to take into account the 10% tax credit. This is an easy calculation, the tax credit = net dividend/9 .
For example if you have received a dividend of £9,000, the tax credit is £1,000
i.e. a gross dividend of £10,000

For the tax year 2008/2009 the basic band is £34,800 of taxable income. This is calculated as ALL income and benefits in kind minus your personal tax allowance.

As you can see from this article, you can plan your dividend payments so as to minimise your tax liability.

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Article Tags: dividend payments, dividend tax, dividends, gross dividend, necessary documentation, personal tax allowance, profits, tax credit, tax liability, tax planning, taxable income, uk limited company



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