What is the optimum pay for 2022/23 – examples

serious ethic businessman working on laptop

Let’s focus on Directors owning their own companies.

A quick summary

Primary NI threshold is changing on 6th July 2022
- Weekly – from £190 to £242
- Monthly – from 823 to £1048
- Annually – from £9880 to £12570 (which is also the income tax threshold)

That basically means an Annual amount of £11908 (3 months at £9880 and 9 months at £12570), £11908 is £992.33 per month (£12570 is £1047.50 per month).

So £992.33 will be below the Employee NI threshold.

However, the Employer NI threshold will be £9100 (£758.33 per month) and from that level Employers NI will be charged at 15.05% unless you have additional employees and are eligible for the Employment Allowance of £5000 (previously £4000).

Dividend Tax rates for 2022/23

Allowance £2000
Lower Rate 8.75%
Higher Rate 33.75%
Additional Rate 39.35%

National Insurance Rates for 2022/23

Class 1 to the Upper Earnings Level 13.25%, then 3.25%
Employer NI Rate 15.05%
Employment Allowance £5000

Here some examples

Example 1

Salary £12570
Dividends £2000 (dividend allowance)
Interest from company £1000 (savings allowance)
Total £15570

You will pay Class 1 Employee NI £87.72 (13.25% of (£12570 – £11908) [£662]) and your company will pay £522.24 (15.05% of (£12570 – £9100) [£3470])

Total NI Paid £609.96

The company will have saved 19% (at the lower rate) of (£12570 + £522.24 + £1000) x 19% = £2677.53 as these costs will be offset against profit

In order to get a dividend of £2000 the company will have been taxed £469.14 (19% of the gross amount)

Example 2

Salary £11908
Interest £1000
Dividends £37000

Employers NI will be £422.60

Dividend Tax will be £35000 – (£12570 – £11908) x 8.75% = £3004.58

In order to pay £37000 in dividends the company will need a profit of £45679 and will have paid 19% (assuming lower rate) which is £8679 corporation tax

Summary

In order to qualify for benefits including the state pension you have to earn above the Class 1 NI threshold

So it seems logical to opt for a Salary of £12570 (£1047.50 per month)

Above this level income tax starts at 20% and NI is 13.25% for the employee and 15.05% for the employer, overall thats 48.3% tax and NI (but the employer may be entitled to the employment allowance offsetting the employers NI and gross pay and employers NI are deductible against corporation tax)

If you have lent money to your company its worth paying some interest (at a commercial rate) as that is tax deductible for the company (saving 19% CT) and there is a savings allowance and in addition interest is not subject to NI, income tax starts at 20%

Dividends are better than salary because there is a £2000 allowance and then tax starts at 8.75%, but remember the company will have paid 19% CT on profits, so overall at lower rates of tax that 27.75% tax but dividends can only be paid if you make a profit or have profit reserves in the balance sheet.

If you are a client and want to try a specific combination perhaps adding other sources of income, let us know.

steve@bicknells.net

Choosing the Optimum Salary for 2021-22

Its a new tax year, small business owners will be deciding how extract their income, lets look at the choices.

Business Expenses

If you personally incur costs for you business, make sure you reclaim them, for example

Business Mileage (keep records of your trips)

Working from Home Costs

Business Travel Costs

If you incur any cost wholly and exclusively for your business you can reclaim it and it tax free to you and tax deductible to the company.

Pensions

Pensions are extremely tax efficient, contributions are normally tax deductible for the company (they can by up to £40k per year), the money grows in the pension tax free and when you reach 55 your can tax up to 25% out tax free.

Electric Company Cars

There are a range of incentives including the Government Plug In Allowance of up to £2,500, very low rates of Benefit in Kind and 100% First Year Capital Allowances.

Interest on Loans

If you have lent money to your company and you borrowed that money and pay interest on it you can claim the interest on your self assessment return for qualifying interest relief.

You company can also pay you interest on the loan but it will need to deduct interest at source at 20% under the CT61 rules.

You can reclaim tax paid on your interest if it was below your allowance. You must reclaim your tax within 4 years of the end of the relevant tax year. Further details at Tax on savings interest – GOV.UK (www.gov.uk)

Salary Options

The tax free allowance is £12,570 (£1,047.50 per month) but National Insurance is the main driver for salary levels

Class 1 National Insurance thresholds	2021 to 2022
Lower earnings limit	£120 per week £520 per month £6,240 per year
Primary threshold	£184 per week £797 per month £9,568 per year
Secondary threshold	£170 per week £737 per month £8,840 per year

Most business owning directors who can take dividends will choose either £737 per month or £797 per month, the £797 qualifies you for state pension, you can check your qualifying years with HMRC

There are special rules for applying National Insurance to Directors

Furlough

If you are on Furlough (CJRS) you should leave you pay at it previous level and then review it when you return to work.

National Minimum Wage

The national minimum wage does not apply to company directors unless they have contracts that make them workers as defined in section 54(3) of the act.

Dividends and the Dividend Allowance

Dividends are a great choice provided you company has made a profit or has profit reserves (if doesn’t its illegal to pay dividends)

Tax year	Dividend allowance
6 April 2021 to 5 April 2022	£2,000
6 April 2020 to 5 April 2021	£2,000

Tax band	Tax rate on dividends over the allowance
Basic rate	7.5%
Higher rate	32.5%
Additional rate	38.1%

steve@bicknells.net

Does a Company pay tax if it receives a Dividend?

We generally recommend creating a holding company to hold property investing companies as it helps to centralise management and can give guarantees to lenders.

Many business owners have a concern that if the holding company receives dividends from subsidiaries that they will be double taxed, once in the subsidiary (before paying dividends) and then on the profit in the holding company when in receives the investment income (dividends). This would be madness!

Dividends paid to UK Holding Companies are normally exempt from Corporation Tax.

https://www.gov.uk/hmrc-internal-manuals/company-taxation-manual/ctm15150

A distribution made by a UK resident company and received by a UK resident company is generally not included in the recipient company’s CT profits. Similarly, such a distribution received by a non-UK resident company trading through a UK permanent establishment is not generally included in the CT profits of that permanent establishment. However, the way in which distributions received by companies are treated for tax purposes changed from 1 July 2009:

Until 1 July 2009, ICTA88/S208 (and for a brief period CTA09/S1285) provided that corporation tax was not chargeable on distributions from UK resident companies.
From 1 July 2009, the way in which distributions from UK resident companies are taxed was aligned with the treatment of distributions from non-UK companies in CTA09/S931A. (Previously, distributions from non-UK resident companies were charged to corporation tax as income from foreign possessions under ICTA88/S18, that is, under Case V of Schedule D). CTA09/S931A charges distributions from UK and non-UK resident companies to corporation tax, but then exempts these from charge in most cases. In practice, this means that most distributions – UK and non-UK sourced – are not chargeable to corporation tax unless these form part of avoidance arrangements.

steve@bicknells.net

What are the consequences of unlawful dividends?

Businessman in police lineup backdrop, illustration, vector

What are the requirements for a legal dividend?

Companies Act 2006 Section 830 – Distributions to be made only out of profits available for the purpose

(1)A company may only make a distribution out of profits available for the purpose.

(2)A company’s profits available for distribution are its accumulated, realised profits, so far as not previously utilised by distribution or capitalisation, less its accumulated, realised losses, so far as not previously written off in a reduction or reorganisation of capital duly made.

(3)Subsection (2) has effect subject to sections 832 and 835 (investment companies etc: distributions out of accumulated revenue profits).

A distribution must be justified by

The Company’s last published accounts
Interim Accounts
Initial Accounts

In small businesses having the right paperwork is vital should HMRC raise any questions, you will need:

Board Minutes
Dividend Vouchers

What are illegal dividends?

Companies Act 2006 Section 847 – Consequences of unlawful distribution

(1)This section applies where a distribution, or part of one, made by a company to one of its members is made in contravention of this Part.

(2)If at the time of the distribution the member knows or has reasonable grounds for believing that it is so made, he is liable—

(a)to repay it (or that part of it, as the case may be) to the company, or

(b)in the case of a distribution made otherwise than in cash, to pay the company a sum equal to the value of the distribution (or part) at that time.

(3)This is without prejudice to any obligation imposed apart from this section on a member of a company to repay a distribution unlawfully made to him.

Mistakes can happen..

Mistakes can happen even to large companies like NEXT PLC…

Whilst the Company always had sufficient reserves to pay the Relevant Distributions at the time that they were made, the Act required this to be demonstrated by reference to interim accounts filed at Companies House prior to payment. Regrettably, those interim accounts were not filed with Companies House until after the Relevant Distributions had been paid and after the lapse had been identified. No fines or other penalties have been incurred by the Company.

Section 386 Duty to keep accounting records

(1)Every company must keep adequate accounting records.

(2)Adequate accounting records means records that are sufficient—

(a)to show and explain the company’s transactions,

(b)to disclose with reasonable accuracy, at any time, the financial position of the company at that time, and

(c)to enable the directors to ensure that any accounts required to be prepared comply with the requirements of this Act (and, where applicable, of Article 4 of the IAS Regulation).

(3)Accounting records must, in particular, contain—

(a)entries from day to day of all sums of money received and expended by the company and the matters in respect of which the receipt and expenditure takes place, and

(b)a record of the assets and liabilities of the company.

(4)If the company’s business involves dealing in goods, the accounting records must contain—

(a)statements of stock held by the company at the end of each financial year of the company,

(b)all statements of stocktakings from which any statement of stock as is mentioned in paragraph (a) has been or is to be prepared, and

(c)except in the case of goods sold by way of ordinary retail trade, statements of all goods sold and purchased, showing the goods and the buyers and sellers in sufficient detail to enable all these to be identified.

steve@bicknells.net

Have you paid unlawful dividends by accident?

Mistakes can happen even to large companies like NEXT PLC…

Whilst the Company always had sufficient reserves to pay the Relevant Distributions at the time that they were made, the Act required this to be demonstrated by reference to interim accounts filed at Companies House prior to payment. Regrettably, those interim accounts were not filed with Companies House until after the Relevant Distributions had been paid and after the lapse had been identified. No fines or other penalties have been incurred by the Company.

So what are the rules….

Companies Act 2006 Section 830 – Distributions to be made only out of profits available for the purpose

(1)A company may only make a distribution out of profits available for the purpose.

(2)A company’s profits available for distribution are its accumulated, realised profits, so far as not previously utilised by distribution or capitalisation, less its accumulated, realised losses, so far as not previously written off in a reduction or reorganisation of capital duly made.

(3)Subsection (2) has effect subject to sections 832 and 835 (investment companies etc: distributions out of accumulated revenue profits).

A distribution must be justified by

The Company’s last published accounts
Interim Accounts
Initial Accounts

In small businesses having the right paperwork is vital should HMRC raise any questions, you will need:

Board Minutes
Dividend Vouchers

steve@bicknells.net

10 ways to pay less income tax

Income Tax is a tax you pay on your income. You don’t have to pay tax on all types of income.

You pay tax on things like:

money you earn from employment
profits you make if you’re self-employed – including from services you sell through websites or apps
some state benefits
most pensions, including state pensions, company and personal pensions and retirement annuities
interest on savings and pensioner bonds
rental income (unless you’re a live-in landlord and get £4,250 (£7,500 from April 2016) or less)
benefits you get from your job
income from a trust
dividends from company shares

So how can you pay less income tax?

Here are 10 suggestions…

Pension

When you pay into a pension you get income tax relief on your contributions .

Lets say you invest £10,000 per year of earned gross income, increasing each year by 3% for inflation and see the effect of tax relief at 40% and 20%, assuming a return on the investment of 7% (which you should get with Commercial Property Investment)

40% Tax Rate				20% Tax Rate
Year	Pension	No Pension	% Diff	Year	Pension	No Pension	% Diff
1	£10,700	£6,252	71%	1	£10,700	£8,336	28%
2	£22,470	£12,954	73%	2	£22,470	£17,272	30%
3	£35,395	£20,131	76%	3	£35,395	£26,841	32%
4	£49,564	£27,808	78%	4	£49,564	£37,078	34%
5	£65,077	£36,013	81%	5	£65,077	£48,017	36%
6	£82,036	£44,773	83%	6	£82,036	£59,698	37%
7	£100,555	£54,119	86%	7	£100,555	£72,158	39%
8	£120,754	£64,081	88%	8	£120,754	£85,441	41%
9	£142,761	£74,692	91%	9	£142,761	£99,590	43%
10	£166,715	£85,987	94%	10	£166,715	£114,649	45%
11	£192,765	£98,000	97%	11	£192,765	£130,667	48%
12	£221,070	£110,771	100%	12	£221,070	£147,694	50%
13	£251,801	£124,337	103%	13	£251,801	£165,782	52%
14	£285,140	£138,740	106%	14	£285,140	£184,987	54%
15	£321,285	£154,024	109%	15	£321,285	£205,365	56%
16	£360,445	£170,233	112%	16	£360,445	£226,978	59%
17	£402,846	£187,416	115%	17	£402,846	£249,888	61%
18	£448,731	£205,621	118%	18	£448,731	£274,161	64%
19	£498,358	£224,901	122%	19	£498,358	£299,868	66%
20	£552,006	£245,309	125%	20	£552,006	£327,079	69%

Even when you consider:

Your money is locked up till you are 55
You pay tax when you take money out of the pension
You can get 25% out of the pension tax free

The difference in growth is massive

If you do salary sacrifice you can increase the tax effect by saving national insurance too.

2. ISA

Individual Savings Accounts have been around for a few years and very soon the Help to Buy ISA will be launched

Top 10 facts and rules…

Its only available to ‘First Time Buyers’
‘First Time Buyers’ can only have one Help to Buy ISA with one provider
You can pay in £1,000 when you open the account and then save a maximum of £200 per month
The maximum government bonus is £3,000 (but you can lower amounts of bonus if you have less than £12,000)
The scheme will run for 4 years from the date it opens (Autumn 2015)
Couples can have a Help to Buy ISA each which means if they don’t want to wait 4 years could save £12,000 in 25 months where as a single saver would need 55 months
Unlike ISA’s where you open one per year, the Help to Buy ISA will continue for 4 years
You can withdraw funds but if its not to buy a home then you won’t get the bonus
More than 100,000 homes have now been bought with government backed schemes
You will be able to get them at banks and building societies

3. Salary Sacrifice

Salary Sacrifice is a very tax efficient way to give your employees benefits and the most popular benefits are Pensions and Childcare. I wrote a blog back in 2011 which explained how it can save 45.8% in tax and NI

HMRC decided on 9th April 2013 that it was time to “clarify” in their Manuals what are successful and unsuccessful salary sacrifice schemes and have added some further guidance. Their Staff are instructed not to approve schemes (Employment Income Manual EIM42772)….

You (HMRC) may get requests for advice:

on how to set up a salary sacrifice arrangement, or

on whether draft documentation will achieve a successful salary sacrifice.

You (HMRC) should not comment on either of these areas. Salary sacrifice is a matter of employment law, not tax law. The nature of an employee’s contract of employment is a matter for the employer and employee.

The specific updates are:

EIM42750 – Salary Sacrifice – updated – this contains the examples of schemes

EIM42777 – Contractual arrangements – this has interesting comments on childcare and pensions

4. Employment Expenses

As an employee you can claim tax relief for expenses incurred in doing your job, for example business mileage, cycling on business, hotels, meals, business phone calls, in fact anything as long as its business related

If your claim is less than £2500 you can make your claim using Form P87 http://www.hmrc.gov.uk/forms/p87.pdf if its more than £2500 you will need to complete a Self Assessment Return (you need to phone HMRC to request a Self Assessment Return – contact details below), if you know your UTR number you can register and file your Self Assessment Return on line.

5. Dividends

When you take dividends has never been more critical due to changes in the Summer Budget 2015, so if you have distributable reserves you might want to take more dividends this tax year, try the Dividend Calculator above to see how much difference it could make.

6. Tax break for Couples

A new tax break as launched this week from 6 April 2015, which will be eligible to more than 4 million married couples and 15,000 civil partnerships.

The Allowance means a spouse or civil partner who doesn’t pay tax – therefore is not earning at all or is earning below the basic rate threshold (£10,600) – can transfer up to £1,060 of their personal tax-free allowance to a spouse or civil partner – as long as the recipient of the transfer doesn’t pay more than the basic rate of income tax.

7. Tax Free Benefits

Getting tax free benefits will save you lots of tax, here some ideas…

Pensions – Up to £40k can be paid in to you pension scheme by your employer (2015/16) and you can use carry forward to pay in even more
Childcare – Up to £55 per week but check the rules to makesure your childcare complies (HMRC Leaflet IR115) – these rules are changing soon.
Mobile Phone – One per employee
Lunch – Tax Free Lunch Blog
Cycle Schemes – Cycle to Work Blog
Fitness – Fitness Blog
Parties and Gifts – Christmas Blog
Parking – Parking Blog
Business Mileage Allowance – 45p for the first 10,000 miles then 25p
Long Service Award – A bit restrictive as you need 20 years service, the tax free amount is £50 x the number of years
Eye Tests and Spectacles – The Eye Test must be needed under the Health & Safety at Work Act
Suggestion Schemes – Suggestion Scheme Blog
Insurance such and Death in Service and Income Protection – Medical Insurance Blog
Travel Expenses – Travel Blog
Working From Home – Working from Home Blog

8. Earn less than £100k

Your Personal Allowance goes down by £1 for every £2 that your adjusted net income is above £100,000. This means your allowance is zero if your income is £121,200 or above.

9. Green Company Car

A calculator is available here: http://www.hmrc.gov.uk/calcs/cars.htm and rates are shown in the table below for zero emission vehicles and some of the lower CO2 vehicles.

10. Check your P800

The P800’s are likely to contain errors because:

Large amounts of data are manually input
Estimates especially for Bank Interest and Investment Income

So check the following carefully:

P60 – you get this at the end of each tax year
P45 – you get this when you leave a job
PAYE Coding Notice
P11D Expenses and benefits
P9D Expenses payments and income from which tax cannot be deducted
Bank and Building society statements
Pension Tax Deductions

Its expected that around 3 million people will be asked to pay more tax and around 2 million people will have overpaid.

steve@bicknells.net

Can my children own shares in my company?

The s660 rules (or settlements legislation) have been around since the 1930s.

The rules stop you passing income to someone else in the family, or giving income or assets to someone else in an effort to reduce your overall tax bill. This is called a “settlement”, and the aim of the legislation is to stop people settling their income on another person who pays tax at a lower rate. (Contractor UK)

There are some interesting cases where business owners have tried to pass shares to their children unsuccessfully

Copeman v Coleman [1939] 22 TC 594

A company had been formed to take over the taxpayer’s business. He held the shares equally with his wife. Later the company created a class of preference shares of £200 each carrying a fixed preferential dividend, the right to vote if such dividend were in arrear for three years or more and the right in a winding up to a return of capital paid up. Some of the shares were taken up by his children on which they paid £10 per share. Dividends substantially in excess of the amounts paid up were then declared and the taxpayer, on behalf of his children claimed repayment of the tax paid in respect of the dividend to the extent of that child’s personal allowance. (http://swarb.co.uk/copeman-v-coleman-1939/)

Crossland v Hawkins [1961] 39 TC 493

The taxpayer, a well known film actor, agreed to work through a company for three years being paid £50 per week. The shares were transferred to his wife and accountant. His father in law set up a £100 settlement for the benefit of his children of which his wife and accountant were the trustees. The fund was used to subscribe for the remaining 98 shares. He appeared in a film for which the company was paid £25,000. The company paid a dividend which was applied by the trustees for the benefit of the children. Jack Hawkins then applied on behalf of his children for a repayment of tax to give effect to their personal allowances. The repayment claim was rejected on the grounds that the whole arrangement was a settlement of which Jack Hawkins was a settlor because he had provided the funds for it. (http://swarb.co.uk/crossland-v-hawkins-ca-1961/)

Butler v. Wildin [1989] STC 22

A company was formed by two brothers who acted as unpaid directors. Shares in the company were initially held by their infant children, which were paid out of gifts from their grandparents. The company acquired a development site using a bank loan, which was guaranteed by the brothers. The company subsequently became profitable, and dividends were subsequently paid to the infant shareholders. The High Court held that the children’s investment of ‘trifling sums’ in the shares and the parent’s provision of services to the company constituted an arrangement. An element of bounty was given by the parents in the free provision of their skill and services, and by adopting any financial risk in the company’s venture. Dividends paid to those children born before the arrangements were made (but not dividends in respect of shares transferred to children born afterwards, as there was no apparent arrangement to benefit future children) were taxable on the parents, under what is now section 660B.(http://www.taxationweb.co.uk/tax-articles/business-tax/is-that-settled-then.html)

Jeremy Vine

Which brings us to the new case of Jeremy Vine

Mr Vine appears to have been using his ten-year-old daughter Martha to avoid tax payments.

The presenter of the Jeremy Vine Show and the TV quiz Eggheads, has been funnelling cash through a limited company, Jelly Vine Productions, of which she is a shareholder.

Jelly Vine Productions had almost £810,000 in cash on its books in 2013 – the last accounts available, and £1million in 2012.

The rules are clear on this and income given to children under 18 will be taxed on their parents so what did his advisers have in mind?

steve@bicknells.net

What if you change a dividend to salary

Let’s look at the case of Richard and Julie Jones v HMRC [2014] UKFTT 1082 (5 December 2014).

They took a small salary and regular dividends from their recruitment company which was absolutely fine until the company got into financial trouble!

Their accountant (unethically but in an attempt to help their client) suggested they should re-write history and change the dividends to salary so that the liquidator couldn’t recall the dividends.

HMRC then decided to demand PAYE and NI and pursued Richard and Julie personally.

HMRC was refused the right to collect PAYE tax and NI due on the salary, not because the law didn’t allow it, but because it wasn’t possible for Richard & Julie to reclassify the dividends. They had been properly paid and the correct procedure followed. History couldn’t be rewritten and the dividends should have been changed to loans if the dividends were illegal.

steve@bicknells.net

Employee Shareholders – will your employees want shares?

The Growth and Infrastructure Act 2013 comes into force on 1st September 2013 and Section 31 makes changes to the Employment Rights Act 1996 inserting section 205A Employee Shareholders.

205A Employee shareholders

(1) An individual who is or becomes an employee of a company is an “employee shareholder” if—

(a) the company and the individual agree that the individual is to be an employee shareholder,

(b) in consideration of that agreement, the company issues or allots to the individual fully paid up shares in the company, or procures the issue or allotment to the individual of fully paid up shares in its parent undertaking, which have a value, on the day of issue or allotment, of no less than £2,000,

(c) the company gives the individual a written statement of the particulars of the status of employee shareholder and of the rights which attach to the shares referred to in paragraph (b) (“the employee shares”) (see subsection (5)), and (d) the individual gives no consideration other than by entering into the agreement.

(2) An employee who is an employee shareholder does not have—

(a) the right to make an application under section 63D (request to undertake study or training),

(b) the right to make an application under section 80F (request for flexible working),

(c) the right under section 94 not to be unfairly dismissed, or

(d) the right under section 135 to a redundancy payment.

Giving up employment rights might not sound like a good idea for employees but there are tax advantages for both the employee and employer:

Dividends are not subject to PAYE or National Insurance
Dividends would not be used as Pay in Auto Enrolment
Capital Gains Tax Allowances should make most gains tax free
The employer will benefit from cost savings on the sacrificed employment rights

steve@bicknells.net

The Growth and Infrastructure Act 2013 was passed on 25 April 2013 – See more at: http://www.shepwedd.co.uk/knowledge/?a=5073#sthash.WVlFdcKS.dpuf

Things you need to know about Dividends…..

It can be illegal to pay dividends if:

1. There are insufficient retained profits to cover the dividend payments

2. Dividend payments may be illegal if the relevant paperwork has not been completed

Board Minutes – which must be kept for 10 years http://www.companieshouse.gov.uk/about/gbhtml/gp3.shtml#ch4
Dividend Vouchers

You can download free templates from

http://www.contractorcalculator.co.uk/declaring_dividends_paperwork.aspx

HMRC are increasingly contending dividends and arguing that they are in reality earnings under the s62 ITEPA 2003 (salary sacrifice) rules and to persuade them otherwise needs proof that a set procedure for the declaration of dividends has been followed.

An example of a board minute is as follows:

Minutes of a meeting of directors of bloggs limited Held at 14 the road, london, ir3 5nl On 31 march 2005

Present: J Bloggs – Director

It was resolved that the company pay a dividend of £9,000 per £1 ordinary share on 31 March 2005 to the shareholders registered on 31 March 2005.

……………………………………
J Bloggs – Director

http://www.ir35calc.co.uk/dividend_documentation.aspx

Companies pay you dividends out of profits on which they have already paid – or are due to pay – tax. The tax credit takes account of this and is available to the shareholder to offset against any Income Tax that may be due on their ‘dividend income’.

When adding up your overall taxable income you need to include the sum of the dividend(s) received and the tax credit(s). This income is called your ‘dividend income’.

The dividend you are paid represents 90 per cent of your ‘dividend income’. The remaining 10 per cent of the dividend income is made up of the tax credit. Put another way, the tax credit represents 10 per cent of the ‘dividend income’.

Dividend tax rates 2011-12

Dividend income in relation to the basic rate or higher rate tax bands	Tax rate applied after deduction of Personal Allowance and any Blind Person’s Allowance
Dividend income at or below the £35,000 basic rate tax limit	10%
Dividend income at or below the £150,000 higher rate tax limit	32.5%
Dividend income above the higher rate tax limit	42.5%

So the 10% tax credit offsets the 10% basic rate tax

Dividends are not subject to National Insurance.

Can you claim the tax credit if you don’t normally pay tax?

No. You can’t claim the 10 per cent tax credit, even if your taxable income is less than your Personal Allowance and you don’t pay tax. This is because Income Tax hasn’t been deducted from the dividend paid to you – you have simply been given a 10 per cent credit against any Income Tax due.

http://www.hmrc.gov.uk/taxon/uk.htm#5