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Dividend Tax impact on other income

Dividend Tax impact on other income

Couldn't sleep, so trawling Twitter and found an article on something called businesszone.co.uk which looks at the new dividend taxes.
It seems to suggest that you get £5k allowance for dividends but that it is included in the total income figures and has the impact of pushing salary into higher rates of tax. I've not seen this angle before. Is it right? I thought we'd got a new allowance to play with?
Apologies if I've completely misread the article or am talking jibberish, it is the middle of the night!

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20th Feb 2016 06:55

Dividend Allowance

Not too sure what you are asking but the £5k Dividend allowance is a standalone allowance irrespective of other income and Dividends are treated as your top slice of income over and above salaries etc.

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20th Feb 2016 08:36

Yeah it is the other way round as epping says

Your salary could push your dividends in to higher rate.
If you have between £500 and £1000 savings interest that slots between your salary and dividends (of less than £5K) , then you could find yourself with a tax liability (perhaps just at basic rate) on savings interest despite having no higher rate tax to pay at all, if some of the dividends occupy the higher rate tax band at 0% (2016-17 rules discussed here only).

They are still mulling over the 2016-17 rules in parliament, so may see some changes.

With kind regards

Clint Westwood

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20th Feb 2016 09:05

This is the example they gave
This was the example given

"Peter earns an annual salary of £43,000 and he receives a dividend of £5,000.
After deducting the personal allowance of £11,000, his salary falls within the basic rate band of £32,000 and his employer will, therefore, deduct basic rate tax through PAYE. His dividend falls within the tax-free allowance of £5,000, so no tax is due on that dividend.
However, for the purposes of calculating Peter’s top rate of tax, his total income of £48,000 must be taken into account; this means that £5,000 of his salary, in fact, falls into the higher rate tax bracket and Peter must complete a self assessment and pay additional tax of £1,000 (ie. the higher rate of 40% less the basic rate of 20% deducted by his employer)."

This was the bit that I thought didn't sound right. Sorry I was vague on the original post. Just hoping I hadn't missed something

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By qhas
20th Feb 2016 11:42

Dividend taxation

accountantccole wrote:
This was the example given

"Peter earns an annual salary of £43,000 and he receives a dividend of £5,000.
After deducting the personal allowance of £11,000, his salary falls within the basic rate band of £32,000 and his employer will, therefore, deduct basic rate tax through PAYE. His dividend falls within the tax-free allowance of £5,000, so no tax is due on that dividend.
However, for the purposes of calculating Peter’s top rate of tax, his total income of £48,000 must be taken into account; this means that £5,000 of his salary, in fact, falls into the higher rate tax bracket and Peter must complete a self assessment and pay additional tax of £1,000 (ie. the higher rate of 40% less the basic rate of 20% deducted by his employer)."

This was the bit that I thought didn't sound right. Sorry I was vague on the original post. Just hoping I hadn't missed something


Not sure that comp is correct. Dividend forms the top slice. Can't see how the additional tax charge of £1k arises
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20th Feb 2016 09:10

And that ...


... is a complete load of bollocks.

Give us the link?  I may have a look for it.

With kind regards

Clint Westwood

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20th Feb 2016 15:00

I checked the income slices as well

There is a reply to Leslie Stalker's article by IeyedJack that clarifies the position. The example above is incorrect.

When the Chancellor's changes were summarised and published by Bankers and Stockbrokers, there was some loose talk, that filled-up my inbox the following day. Scare mongering stuff designed to sell the blog as news or advertising and promotion for ''Shout-out-Loud'' taxation services.

Because news publications are so wooly, I checked with the tax department at HSBC the next day, and they confirmed . . .

That as hitherto for many years, income slices are preserved in their respective order. Therefore in the example above, Peter may also receive 2nd slice Interest of up to £1,000 without taking him into the higher rate band.

 

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By Ruddles
20th Feb 2016 15:35

£1,000 or £500?

In the example above, Peter will be a higher-rate taxpayer (or would be were it not for the 0% dividend band and/or savings allowance. But I haven't yet examined the rules in detail, hence the "?".

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20th Feb 2016 16:37

Will £500 be deducted from the savings allowance progressively ?

Ruddles wrote:

In the example above, Peter will be a higher-rate taxpayer (or would be were it not for the 0% dividend band and/or savings allowance. But I haven't yet examined the rules in detail, hence the "?".

Indeed, I did not check, nor ask whether £500 was knocked off the Savings allowance for Employment or Trading income at £32,001.

I shall have to investigate rather soon. I have a hunch that the £500 will be progressively withdrawn

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20th Feb 2016 15:57

Stacking rule?

A stacking rule such as that described is common in other countries and is a neat way of raising revenue without increasing the top rate of tax.  Although the new rules remain uncertain, the idea of a stacking rule will doubtless re-surface in the future.

How is the newly exempt £5,000 dividend going to be treated for UK tax credits?

 

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By Ruddles
20th Feb 2016 16:08

It's not exempt, David

And I wish people would stop using that expression. It's taxable income, just like the rest of dividend income - it just so happens that the rate of tax is 0%.

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20th Feb 2016 16:16

Kids - who'd have them ?

Ruddles wrote:

And I wish people would stop using that expression. It's taxable income, just like the rest of dividend income - it just so happens that the rate of tax is 0%.

Indeed - and don't forget the effect on Child Benefit clawback as well.  That £5,000 is part of your £50,000 threshold.

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By Ruddles
20th Feb 2016 16:43

I don't think it is progressive

My limited understanding is that if you have any income (including interest that would taxable were it not for the allowance) taxable at higher rate then the allowance is £500. ie it is either £1,000, £500 or £0. So, for example, if someone as earnings of say £31,600 after PA and interest of £700 they'll have an allowance of £500. So, £100 taxable at 40%. But I could be wrong ...

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20th Feb 2016 19:45

2nd Thoughts, and my Hunch is clearly wrong !

The income bands are far too wide for any sort of progressive fairness.

The 0% allowance will be chopped off as you say.

However, in your workings, I would say 31,600 + 700 = £32,300, less 0% rate interest income allowance £500 = £31,800, therefore no liability to higher rate, and therefore no interpretation problems arise.

I can see additional pension contributions being made in March each year to mitigate this liability, just as they have been paid by individuals earning £120k or more, who want their PA back into the tax comp.

The interpretation of the Chancellor's statement becomes more of a problem when chargeable E or T income is say £31,865 and Interest was £995 and dividends were £4,950. I was told that these "savings income allowances" are ring fenced, and applied to the investment income slices.

In the above example, therefore at moment, I believe that zero HR tax would be due.

Mind you, an individual requires a rather large deposit to earn £1,000 in interest ! However, there are equity investors in **OEICs and Unit Trusts who will receive income at the 20% rate, that is / was not hitherto classed as dividends.

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20th Feb 2016 22:25

Confusion abounds...

Savings income qualifies for the new personal savings allowance and the amount available is £1,000 if your total income ignoring personal allowances is below the higher rate threshold - £43,000 from 6 April 2016, but £500 if above but less than £150,000.  However, and I am now going to shout, DIVIDEND INCOME IS NOT SAVINGS INCOME.  As stated in a couple of replies above the dividend allowance is a rate of 0% on the first £5,000 of aggregate dividends received, regardless of the marginal rate that applies treating the dividend income as the TOP SLICE of income.

Hence "Peter earns an annual salary of £43,000 and he receives a dividend of £5,000.
After deducting the personal allowance of £11,000, his salary falls within the basic rate band of £32,000 and his employer will, therefore, deduct basic rate tax through PAYE. His dividend falls within the tax-free allowance of £5,000, so no tax is due on that dividend.
However, for the purposes of calculating Peter’s top rate of tax, his total income of £48,000 must be taken into account; this means that £5,000 of his salary, in fact, falls into the higher rate tax bracket and Peter must complete a self assessment and pay additional tax of £1,000 (ie. the higher rate of 40% less the basic rate of 20% deducted by his employer)."

This was the bit that I thought didn't sound right. Sorry I was vague on the original post. Just hoping I hadn't missed something"

Peter has income of £48,000 and a personal allowance of £11,000, hence £37,000 is taxable.  The Salary is the first slice, hence £32,000 because the dividend is the top slice and that is £5,000.  £32,000 at 20% is £6,400.  The next £5,000 is dividend and is charged at 0% hence the liability is... zero.  His total liability for the year is £6,400.  If he received a dividend of £6,000 then the total would be £49,000, after the personal allowance of £11,000 he would be left with £38,000 of which £6,000 would be dividend leaving £32,000, all charged at 20%, of course.  The first £5,000 of the dividend would be charged at 0% and the remaining £1,000 would be charged at 32.5% giving a liability of £325.  None of this is savings income so the personal savings allowance is not in point. So...

Patrick has a salary of £42,500, Interest from a building society of £1,200 (that IS savings income) and a dividend of £6,000 - what now?  His total income is £42,500 plus £1,200 plus £6,000, a total of £49,700 - the top £6,000 is dividend.  This is more than £43,000 so his personal savings allowance is £500.  To calculate his liability we now add the salary of £42,500 to the savings income net of the personal savings allowance, £1,200 minus £500 is £700, so this is a total of £43,200 and to this we add the dividend of £6,000, a total of £49,200.  Deduct the personal allowance of £11,000 and we are left with £38,200, the top slice of which is the dividend of £6,000, leaving £32,200 of non-dividend income.  The first £32,000 is charged at the basic rate of 20%, £6,400 and the next £200 at 40% which is £80.  The next slice is £6,000 of dividend income of which the first £5,000 is charged at 0% and the remaining £1,000 at 32.5%.  So his total liability is £6,400 plus £80 plus £325, a total of £6,805.  Hope this helps...

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By Ruddles
21st Feb 2016 13:37

Are you sure, Paul?

The draft legislation simply says that savings income eligible for the £500 or £1,000 alllowance is taxed at 0% - I can't see anything that excludes it from the calculation of income. I get £6,905 - think I'll wait to see what our software does.

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21st Feb 2016 18:31

Agree with Ruddles

Ruddles wrote:

The draft legislation simply says that savings income eligible for the £500 or £1,000 alllowance is taxed at 0% - I can't see anything that excludes it from the calculation of income. I get £6,905 - think I'll wait to see what our software does.

I read it as another zero rate band.

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22nd Feb 2016 09:29

Sorry...

That'll teach me to rattle off a reply late at night - now corrected

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21st Feb 2016 18:25

Chargeable income is always aggregated

At whatever rate, in whatever slice.

The difficulty I'm having is interpretation.

KPMG say that the 0% rate band is restricted to £5,000 (2016-2017) of  "Savings Income"  I put that phrase in inverted commas in my last post. This of course is the flawed generic term used by the Chancellor and accounting bodies / firms / journalists - for Investment Income.

If one were to interpret the Autumn statement as it has been reported and summarised.

One would calculate the 0% rate band as being £6,000 for Basic rate payers, £5,500 for Higher rate tax payers and £5,000 for Additional rate payers - which for simplicity, the Chancellor says is dividend income during the budget statement. I'm not sure that those figures will be used because of the overiding 5k restriction that appears on most preliminary published tax tables.

Unless, a what if calculation is performed at £32k and £150k, and the savings interest allowance is bought into effect or chopped off at its respective level. Perhaps the 'new' personal savings allowance will operate in a similar way as PA eligibilty.

    Interpretation . . . . .

 

 

 

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21st Feb 2016 19:38

Yes, Effective zero rate band overall £5,500

and applied to their respective income slices, and total £6,905 tax liability for Paul's example, but calculated correctly by Ruddles .

I'm happier with my interpretation of the way the comp will work / should work.

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22nd Feb 2016 08:00

OTS

Looks like the Office of Tax Simplification are doing a good job - I reckon  a knighthood is on the way for one of these people.

 

 

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By vstrad
24th Feb 2016 15:35

Not the OTS's fault ...

thomas34 wrote:

Looks like the Office of Tax Simplification are doing a good job - I reckon  a knighthood is on the way for one of these people.

 

 

The current  remit of the OTS explicitly confines it to looking at existing tax legislation. I heard a radio interview with the new Chairman of the OTS recently. She said she would be pushing for the remit to be extended to scrutiny of proposals for new legislation. Whether any Chancellor would actually allow the OTS to curtail his ambitions is another matter.

 

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22nd Feb 2016 09:27

Savings income...

There is of course a difference between the Savings Rate of Tax - 0% on the first £5,000 but only where income other than savings income is less than £5,000 plus the PA, mainly useful for the elderly of course, and the Personal Savings Allowance which is a 0% rate applied to either the first £1,000 (where total income from all sources ignoring the PA etc is £43,000 or less (PA plus basic rate band) or £500 if total income is above that figure but less than £150,000 - using, of course 2016/17 figures.  Dividend Income is NOT savings income so the Dividend Allowance, £5,000 but a different £5,000, is chargeable at 0% where total dividends (except those received in an ISA or other exempt wrapper) are more than £5,000 regardless of the marginal rate.  In my example above which I botched through late night zeal I was really concentrating of the dividend allowance rather than anything else. 

So a corrected version reads "Hence Peter earns an annual salary of £43,000 and he receives a dividend of £5,000.
After deducting the personal allowance of £11,000, his salary falls within the basic rate band of £32,000 and his employer will, therefore, deduct basic rate tax through PAYE. His dividend falls within the tax-free allowance of £5,000, so no tax is due on that dividend.
However, for the purposes of calculating Peter’s top rate of tax, his total income of £48,000 must be taken into account; this means that £5,000 of his salary, in fact, falls into the higher rate tax bracket and Peter must complete a self assessment and pay additional tax of £1,000 (ie. the higher rate of 40% less the basic rate of 20% deducted by his employer)."

This was the bit that I thought didn't sound right. Sorry I was vague on the original post. Just hoping I hadn't missed something"

Peter has income of £48,000 and a personal allowance of £11,000, hence £37,000 is taxable.  The Salary is the first slice, hence £32,000 because the dividend is the top slice and that is £5,000.  £32,000 at 20% is £6,400.  The next £5,000 is dividend and is charged at 0% hence the liability is... zero.  His total liability for the year is £6,400.  If he received a dividend of £6,000 then the total would be £49,000, after the personal allowance of £11,000 he would be left with £38,000 of which £6,000 would be dividend leaving £32,000, all charged at 20%, of course.  The first £5,000 of the dividend would be charged at 0% and the remaining £1,000 would be charged at 32.5% giving a liability of £325.  None of this is savings income so the personal savings allowance is not in point. So...

[So far so good]

Patrick has a salary of £42,500, Interest from a building society of £1,200 (that IS savings income) and a dividend of £6,000 - what now?  His total income is £42,500 plus £1,200 plus £6,000, a total of £49,700 - the top £6,000 is dividend.  This is more than £43,000 so his personal savings allowance is £500.  To calculate his liability we now add the salary of £42,500 to the savings income £1,200, this is a total of £43,700.  Deduct the personal allowance of £11,000 and we are left with £32,700 all non-dividend income, of which the salary is £31,500 - chargeable at the basic rate of 20%, a total of £6,300.  The next £1,200 is savings income, bringing the total excluding the personal allowance up to £32,700 - £500 of which is charged at 0% and the remaining £700 at 40% - £280.  Then the dividend gets added and the total is less than £150,000, so the dividend is £6,000, of which the first £5,000 is charged at 0%, the remainder at 32.5% which is £325.  Total tax payable on the different classes of income seems to be £6,300 on the earned income, £280 on the savings income and £325 on the dividend income, a grand total of £6,905."  Rather than the £6,805 I came up with incorrectly.

I must say I do partly agree with Thomas34 - this is an insanely complex way to determine a liability but this is what happens when politicians interfere with the tax system, I don't think we can blame the OTS for this one...

 

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22nd Feb 2016 14:24

OTS

Paulsoper wrote:

There is of course a difference between the Savings Rate of Tax - 0% on the first £5,000 but only where income other than savings income is less than £5,000 plus the PA, mainly useful for the elderly of course, and the Personal Savings Allowance which is a 0% rate applied to either the first £1,000 (where total income from all sources ignoring the PA etc is £43,000 or less (PA plus basic rate band) or £500 if total income is above that figure but less than £150,000 - using, of course 2016/17 figures.  Dividend Income is NOT savings income so the Dividend Allowance, £5,000 but a different £5,000, is chargeable at 0% where total dividends (except those received in an ISA or other exempt wrapper) are more than £5,000 regardless of the marginal rate.  In my example above which I botched through late night zeal I was really concentrating of the dividend allowance rather than anything else. 

So a corrected version reads "Hence Peter earns an annual salary of £43,000 and he receives a dividend of £5,000.
After deducting the personal allowance of £11,000, his salary falls within the basic rate band of £32,000 and his employer will, therefore, deduct basic rate tax through PAYE. His dividend falls within the tax-free allowance of £5,000, so no tax is due on that dividend.
However, for the purposes of calculating Peter’s top rate of tax, his total income of £48,000 must be taken into account; this means that £5,000 of his salary, in fact, falls into the higher rate tax bracket and Peter must complete a self assessment and pay additional tax of £1,000 (ie. the higher rate of 40% less the basic rate of 20% deducted by his employer)."

This was the bit that I thought didn't sound right. Sorry I was vague on the original post. Just hoping I hadn't missed something"

Peter has income of £48,000 and a personal allowance of £11,000, hence £37,000 is taxable.  The Salary is the first slice, hence £32,000 because the dividend is the top slice and that is £5,000.  £32,000 at 20% is £6,400.  The next £5,000 is dividend and is charged at 0% hence the liability is... zero.  His total liability for the year is £6,400.  If he received a dividend of £6,000 then the total would be £49,000, after the personal allowance of £11,000 he would be left with £38,000 of which £6,000 would be dividend leaving £32,000, all charged at 20%, of course.  The first £5,000 of the dividend would be charged at 0% and the remaining £1,000 would be charged at 32.5% giving a liability of £325.  None of this is savings income so the personal savings allowance is not in point. So...

[So far so good]

Patrick has a salary of £42,500, Interest from a building society of £1,200 (that IS savings income) and a dividend of £6,000 - what now?  His total income is £42,500 plus £1,200 plus £6,000, a total of £49,700 - the top £6,000 is dividend.  This is more than £43,000 so his personal savings allowance is £500.  To calculate his liability we now add the salary of £42,500 to the savings income £1,200, this is a total of £43,700.  Deduct the personal allowance of £11,000 and we are left with £32,700 all non-dividend income, of which the salary is £31,500 - chargeable at the basic rate of 20%, a total of £6,300.  The next £1,200 is savings income, bringing the total excluding the personal allowance up to £32,700 - £500 of which is charged at 0% and the remaining £700 at 40% - £280.  Then the dividend gets added and the total is less than £150,000, so the dividend is £6,000, of which the first £5,000 is charged at 0%, the remainder at 32.5% which is £325.  Total tax payable on the different classes of income seems to be £6,300 on the earned income, £280 on the savings income and £325 on the dividend income, a grand total of £6,905."  Rather than the £6,805 I came up with incorrectly.

I must say I do partly agree with Thomas34 - this is an insanely complex way to determine a liability but this is what happens when politicians interfere with the tax system, I don't think we can blame the OTS for this one...

 

I wasn't particularly trying to apportion blame Paul, more observing their impotence.

No doubt they'll try to take credit for a few changes to the tax system (I'm sure there are a few) but these may have happened anyway. There were totally impotent on IR35 - never had the guts to advise scrapping it.

I just hope I don't get a client with some of the hypothetical income figures shown above because I'll likely have to rely on software. If I'm struggling the taxpayer won't stand a chance of understanding the various orders of set off for the personal allowance.

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23rd Feb 2016 10:43

OTS has a lot to answer for. I had my own spreadsheet working just peachy for dividends, salary, EBR and tapered allowances. I decided today I should add in PSA and SRB. Damn, two hours and I still have to sanity test it (though it is managing to produce the extra £100.20 tax on the £1 above BRB, so that's encouraging).

Trying to avoid circular references has been a nightmare, and factoring in nil bands and PSA for HR bands. I'm going slowly insane, but I will beat it.

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24th Feb 2016 12:40

Savings 'allowance'
It seems confusing to describe the savings allowance as an allowance, and I can see how this lead to paulsoper calculating the tax in his first version at the Patrick example £100 lower than in his second version. The difference is in the application of the 'allowance' and what needs clarifying is whether this figure overlaps with the basic rate band and effectively substitutes 0% for the 20% tax rate or whether it can effectively be added to the personal allowance and the full basic rate band used afterwards.

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24th Feb 2016 21:14

It is the former

fiaustin wrote:
It seems confusing to describe the savings allowance as an allowance, and I can see how this lead to paulsoper calculating the tax in his first version at the Patrick example £100 lower than in his second version. The difference is in the application of the 'allowance' and what needs clarifying is whether this figure overlaps with the basic rate band and effectively substitutes 0% for the 20% tax rate or whether it can effectively be added to the personal allowance and the full basic rate band used afterwards.
.

It is the former in that the savings interest relieved by the Personal Savings Allowance is still taxable income and so has to consume part of the  "bands".  The only tax complexity that the PSA adds to Income Tax computation on savings is that the degree of PSA given depends upon the Adjusted Nett Income. See:

https://www.gov.uk/guidance/adjusted-net-income

... and the complexity is that for the first time, I believe, the tax on taxable savings income is a function of Dividend Income.

Tax Simplification?  Huh!

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24th Feb 2016 13:33

What a complete mess this is. If lots of accountants can't easily come up with the right answer, how are members of the public supposed to have any idea what their marginal tax rate is going to be.

I can imagine there will be people out there currently just under higher rate tax with dividend income, buy-to-let property income and savings income who as a result of the changes may be pushed into higher rate tax or even child benefit clawback even if there is no changes at all in income, and have no reasonable way of wading through the complexity.

If anyone thinks increased pension contributions are the answer, reading between the lines of press reports, Osborne is right now looking at abolishing tax deductible pension contributions in the next budget and replacing them with another complex tax credit arrangement similar to that for buy-to-let interest - just remains to be seen if the backbenchers can stop him before the next bit of idiotic politically motivated tax complexity is brought in, and people earning around the higher rate threshold give up all hope of increasing their take home pay meaningfully by earning more and just give up trying...

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24th Feb 2016 16:13

Not as successful first time out

Tim Good wrote:

I'm very relieved that my tax app came up with £6,905 not £6,805!

My spreadsheet didn't :(

It does now :)

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24th Feb 2016 15:08

Gift Aid

When completing a tax return where

a) The taxpayer is only slightly into higher rates and hence there is the loss of, or reduction, in the marriage allowance or savings allowance or both such that the marginal rate of tax is eye watering, and

b) The taxpayer is in the habit of making Gift Aided donations

It would seem to be worthwhile to consider carrying back some or all Gift Aided amounts paid in the current year to date back to the preceding year. This has to be done, if it were to be done, on the original return. You cannot do by amending a return. And it cannot be done if the return is being filed late.

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24th Feb 2016 16:03

old news, heh heh

Duncan Cameron wrote:

When completing a tax return where

a) The taxpayer is only slightly into higher rates and hence there is the loss of, or reduction, in the marriage allowance or savings allowance or both such that the marginal rate of tax is eye watering, and

b) The taxpayer is in the habit of making Gift Aided donations

It would seem to be worthwhile to consider carrying back some or all Gift Aided amounts paid in the current year to date back to the preceding year. This has to be done, if it were to be done, on the original return. You cannot do by amending a return. And it cannot be done if the return is being filed late.


Indeed, as illustrated in Case 6 in this thread, where you can get 16000% tax relief on a gift aid payment.

http://www.accountingweb.co.uk/anyanswers/question/personal-savings-allo...

All subject to the publication of legislation next month of course.

With kind regards

Clint Westwood

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