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Allocation of personal allowance

A client has income of £20,647 and dividends of £24,975. Total income is £45,622. CCH software allocates the whole personal allowance of £11,500 against the employment income. Can £622 of the personal allowance be allocated against the dividend income thus avoiding the higer rate tax on dividends?

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By SXGuy
08th Nov 2018 16:54

No.

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08th Nov 2018 17:00

What higher rate tax on dividends?

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08th Nov 2018 17:35

Wouldn't you be replacing 32½% dividend tax with 40% higher rate tax ?

Even if you could do it, which you can't ?

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to lionofludesch
08th Nov 2018 17:53

There isn't any 32½% tax or any 40% tax. Nothing's taxable at the higher rate.

You'd be replacing 7½% tax with 20% tax.

You CAN theoretically do it. It would just be incredibly stupid.

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to Portia Nina Levin
08th Nov 2018 20:03

Portia Nina Levin wrote:

You CAN theoretically do it. It would just be incredibly stupid.

Er, no you can't. The legislation specifically requires you to use the optimal allocation of allowances. s25(2) ITA 2007.

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to Tim Vane
09th Nov 2018 10:30

I was considering the hypothetical situation, set out in the OP, where the taxpayer ('s agent) held the genuine belief that they were doing exactly that ting.

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to Tim Vane
09th Nov 2018 10:38

Tim Vane wrote:

Er, no you can't. The legislation specifically requires you to use the optimal allocation of allowances. s25(2) ITA 2007.

What ???

This will be news to the blokes who wrote the Self Assessment algorithms, won't it ?

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08th Nov 2018 19:17

CCH works out the liability to be:

Income of £20,647 less personal allowance of £11,500 = £9,147 @ 20% = £1,829.40

Dividends income of £5,000 @ 0%, £19,353 @ 7.5% = £1,451.47 and £622 @ 32.5% = £202.15

Is this not correct? Can the personal allowance be split £622 to the dividends and the balance of £10,878 against employment income?

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to aphilton
08th Nov 2018 20:10

aphilton wrote:

Can the personal allowance be split £622 to the dividends and the balance of £10,878 against employment income?

No, because the total tax would be higher. You'd still have £622 taxed at 32.5%, but would also have additional tax at 20%. All you've done is allocate £622 of personal allowance against dividends that were already taxed at 0%.

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to aphilton
09th Nov 2018 10:02

The point which you are missing is that when you move the £622 over to the salary, the £9,147 becomes £622 larger and the £19,353 therefore becomes £622 smaller as the band remains the same size.

The £622 dividends in higher rate therefore remain, regardless.

Think about it like this if you prefer, if your income is £622 over the higher rate threshold then it always will be regardless of how you line the bits up at the bottom. You can therefore tax it at 32.5% or at 40%, 32.5% is better.

Shuffling the PA only helps if you can move the dividend nil rate band into the higher rate tax band.

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09th Nov 2018 11:38

Yes I agree with Duggimon. By allocating £622 of the PA against dividends, the amount taxed at 20% goes up and the amount taxed at 7.5% goes down by the same amount. Overall tax liability therefore rises.

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