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Self assessment on limited company dividend income
Posted Feb 1, 2012
A reader recently sent in an question asking whether or not his wife needs to register to fill in a tax return, even though no tax will be payable on her dividend income.
The shareholdings of many limited companies are split between husband and wife (or between partners), and in some cases the dividend income from the company will be the sole source of income for the main fee earner's spouse.
Dividend income is taxed in a different way to salaried income, and is declared via the annual self assessment process.
How are dividends taxed?
After deducting the personal allowance (if you qualify to receive it), dividends are taxed at 10% if they fall below the higher rate threshold (£35,000 in the 2011/12 tax year).
Dividends are taxed at 32.5% in the higher rate band, and 42.% for income in excess of £150,000 per year.
In order to calculate the tax payable on dividends, you must first add a 10% tax credit to your net dividend amount, before applying the dividend tax rate.
Importantly, if your dividend income falls below the prevailing higher rate tax threshold, there is no tax to pay at all, as the 10% tax credit wipes out the 10% dividend tax rate.
However, just because no tax is due in a given tax year, does this mean that you have no obligation to tell the tax authorities that dividends have been received?
Do you need to register or a tax return if you are a lower rate taxpayer?
Answering the original reader's question - does the contractor's wife have to register to fill in a tax return if her total income falls beneath the higher rate threshold, Emily Coltman from FreeAgent, told us:
"The answer to the question is yes, she does, because she's receiving dividend income, which comes under the label of 'income from savings and investments', of over £10,000 a year."
You can find out more information on the HMRC site here.
When do you have to register to complete a tax return?
"I'd recommend she registers with HMRC as soon as she knows she's going to receive that income. At the latest she must register by 5th October 2012 to file a tax return for 2011/12."
Here's what HMRC say about the registration process.
Emily Coltman ACA, is Chief Accountant at FreeAgent.
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