UK Question on personal allowance & dividend allowance

[gwhelan100]

I am helping a family member who has recently set up a limited company.

She has taken no salary/dividends/drawings since she started trading. Her UK personal tax allowance of £11,500 has been untouched for 2017/18.

The business has a healthy cash balance. My relative plans to pay herself £16,500 tax free as a dividend. The reasoning behind the tax-free calculation is that £5,000 of the payment is covered by the dividend allowance for 2017/18, and the remaining £11,500 is covered by her unused personal tax allowance.

I spoke with HMRC who agreed that this would be tax free, but they werent particularly certain of their advice, which surprised me a little.

Just wanted to check with anybody on this forum that my reasoning is correct and that yes she can withdraw £16,500 as a dividend without attracting a tax liability

 

[Becky]

This is correct - if there is no other income during the 2017/18 tax year then the full personal allowance is available to be set against dividends. There is a useful factsheet on the dividend allowance, which has some illustrative examples:

https://www.gov.uk/government/publications/dividend-allowance-factsheet/dividend-allowance-factsheet

As you can see from example 3, part of the dividend is covered by the personal allowance.

The reason that the person you spoke to at HMRC may not have been sure is because it doesn't really state this outright in any of their guidance. Plus the people on the other end of the phone tend to be quite inexperienced!

 

[gwhelan100]

Thank you for your confirmation Becky!