Maximise use of your basic rate tax band

I originally posted this article on the a4uforum in March 2007, and have updated it for the current tax thresholds.

We recommend to all our clients that they maximise the use of their basic rate band. This can be done by declaring interim dividends to take total taxable income upto the maximum at which the basic rate will still apply.

As dividends have a 10% tax credit attached, this tax credit can be used to effectively pay your personal tax liability on the dividend.

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A quick guide for your new limited company

Getting at your profits

Extracting your profits from your company can be by a mix of wage (ie under PAYE) and dividend. In order to pay a dividend the company must have sufficient after tax profits. ie for a £10k dividend to be paid the company must have approx £12.7k pre tax profits (corp tax rate of 21%).

Do not be tempted to withdraw more than is legally available as dividend, as it would be “illegal” and HMRC may class it as a salary or a loan to the director (taxable benefit in kind if over £5k) and charge tax & NIC.

For more on how to extract your profits in a tax efficient way, read our article “Save tax and National Insurance with your limited company”.

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