I am currently preparing a SA100 for a client using the HMRC software. My client receives a small amount of employment income/benefits, a little savings interest and dividends. All of his income/benefits and savings interest are covered by his personal allowance, as is c£350 of his dividend income. I've calculated the tax due on the dividends (some at 32.5%), and am in agreement with that calculated by HMRCs software. However, in deducting the tax credit for the dividend, the software only takes into consideration the tax credit for that which is being taxed in the computation, i.e. not on the £350 that is covered by the PA. I've shown an example below to clarify:
Dividend income: £33,860 (including tax credit of £3,386)
£350 covered by PA
£32,010 @ 10% = £3,201
£1,500 @ 32.5% = £1,499.68
Total tax due = £4,700.68
Less 10% dividend tax credit = £3,351
Thus excludes £35 of tax credit already paid, and thus overcharges the client tax (obviously something they wouldn't want to do due to an error). I know not huge numbers involved, but want to ensure it's correct.
Has anyone else had the same issue? Or have any suggestions to correct? When I have spoken with HMRC, they have suggested submitting the return and contacting them after 72 hours to discuss (so they can see the calculation/error). I'm a little reluctant to submit something which I know to be incorrect.
Many thanks for your help in advance
Replies (4)
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Not repayable
The tax credit covered by the PA is not repayable, so can't reduce the higher rate tax liability. If you correct your calculation to show 32.5% tax due as just £487.50, the resulting overall liability will be £337.50, which is the correct amount of tax due on the divi taxed at higher rate.
Tax credit only available on taxable element
The tax credit is only available on the taxable part of the dividends. Therefore, if the Personal Allowance reduces the amount of dividend which is taxable, the tax credit also reduces.
Therefore, in your case, the £350 dividend covered by the Personal Allowance cannot have a tax credit (which is the £35 you are querying).
Spot on
Yes, that's exactly it. You can't cover dividend income with personal allowance.
Changed twenty or thirty years ago. Prior to that, you could.