Hi guys,
Please can someone validate a tax calculation for me. First time for me paying a dividend for a client that goes into the higher tax bracket....!
8000k Paye
45k Net Dividend
50k Gross Dividend
58k Total Income.
26370 dividend paid and taxed at 10%
(26370 and 8000 paye = 34370 / 10% limit)
23630 dividend paid and taxed at 32.5%
No tax to pay on the 26370 as the 10% dividend tax credit covers it.
On the 23630, 32.5% equates to 7679.75. 10% credit reduces it by 23630 x 10% = 2363, thus 7679 - 2363 = 5316. Thus, that would seem to be the remaining tax to pay.
However in practice, it seems that 23630 x 25% = 5907.5 of which only 15% remains so remaining liability is 23630 x 15% = 3544. Is this the correct figure that would be paid at the end?
That being the case, can someone please explain to me if the dividend credit is only 10%, then why does the 32.5% tax not get paid on the higher bracket. it seems as though the credit becomes 17.5% on the higher band...
Many thanks guys.. as always.....
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Replies (4)
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think you are getting mixed up.....
your 'in practice' calc seems to confuse how you get to the additional tax using the quick way to calc the tax....that is taking 25% of the net dividend (23630 * 90% = 21267)....21267 * 25% = 5316
If it's 2012/13....
Doing the numbers from scratch, I get them as follows:
Personal allowance
£8,000 salary - no tax
£105 dividends - no tax
Basic rate band
£34,370 dividends - no tax
Higher rate band
£15,525 @ 32.5% = £5,045.62 [50,000 - (34,370+105) = 15,525]
Less: tax credit (£15,525 x 10%) = £5,045.62 - £1,552.50
= £3,493.12 total tax payable - (through self assessment on 31 January 2014 if no payments on account)
If you're looking at the gross dividend, you need to tax it at 22.5% in the higher rate band. This is the 32.5% income tax less the 10% tax credit.
It's only 25% when looking at the net dividend. You can see this by grossing up the rate of income tax on the dividend: 22.5% x 10/9 = 25%
would agree with BJ....I was a bit
lazy, just looked at the way in which you calculated the higher rate tax and then reconciled....