IT Contractor Tax - Accountants for Contractors

Limited company contractors, who fall outside the IR35 rules, will derive their income via salary (usually small), and dividends.

There are currently three rates of dividend tax, following the introduction of the "additional rate" for income in excess of £150,000.

Dividend tax rates - 2013/14

• For income at or below the £35,000 basic rate limit - 10%


• For income at or below the £150,000 higher rate limit - 32.5%


• For income above the higher rate limit - 37.5%

How much tax do you actually pay?

For self assessment purposes, the net dividend represents 90% of the gross dividend upon which you pay tax. You also receive a 10% tax credit to compensate for having already paid Corporation Tax on the company income.

When calculating your real dividend tax liability, you must multiply the net dividends you have declared by 100/90 to take account of the 10% tax credit.

• For income at or below the £35,000 basic rate limit there is no additional tax to pay, as the 10% tax credit cancels out the 10% basic rate.


• For income at or below the £150,000 higher rate limit, the effective tax rate is 25%


• For any income above the higher rate limit, the effective tax rate is 30.55%

Dividend timing

Over the past year, several accountancy firms have warned about the increasing number of HMRC cases where directors have declared dividends illegally.

David Houston from Clarity, the contractor accountants, said that limited company directors must always be sure that the company has enough accumulated post-tax profits built up to cover the dividend payment. If care it not taken, the director could be 'borrowing' money from the company - leading to an overdrawn Director's Loan Account.

"This runs the risk of, at the very least, an uncomfortable line of questioning from HMRC, and could lead to extra income tax and National Insurance Contributions (NICs) becoming payable should the dividend be reassessed as salary.

"You must also ensure that you have passed an appropriate board resolution, and that this is kept in your statutory records. Each shareholder must receive a dividend voucher."

Read more about board meetings and dividend vouchers here.

Further information

You should always ask your contractor accountant if you have any questions about the timing or taxation of dividends

For more details, including an example calculation, read how much tax to pay on dividends.

Also, try our overview of limited company dividends.

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