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Dividend Allowance of £5K

I disagree with the software calculations of personal tax because of the dividend allowance

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Dear colleagues i would be most grateful if you could give me your comments on this as my personal tax calculation on a client differs form that of the software

Non dividend income         38,116   Personal Allowance and qualifying interest relief   11,100   Dividend income 60,006  Total taxable 87,022                                  38116 - 11100 =          27016 taxed at 20%                                                                                                                                                                                               Remaining BR band       4984 to be offset agains dividend income and since this is within the basic rate band it would be the restricted dividend allowance not £5k  Is this correct?  My understanding is that the dividend allowance is restricted to the BR band                                                                                                                The remaining dividend income ie 60,006-4984 =55,022 taxed at 32.5%                                                                                                                                                Is this correct? I would be most grateful to hear your comments. The software has done something different

 

 

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By Wanderer
19th Jul 2017 15:19

MGD wrote:

  My understanding is that the dividend allowance is restricted to the BR band  

Where are you getting that from?
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By MGD
19th Jul 2017 15:21

from the various courses I attended

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By Wanderer
19th Jul 2017 15:25

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

The Dividend Allowance means that you won’t have to pay tax on the first £5,000 of your dividend income, no matter what non-dividend income you have.

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By MGD
19th Jul 2017 15:33

I know that!!!!!

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By Cheshire
19th Jul 2017 16:32

MGD wrote:

I know that!!!!!

I am confused when you say 'I know' as you state in your original post that the dividend allowance is restricted to the BR band, which indicates the opposite. Its available to all. Am reading this incorrectly?

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By craigbisby
19th Jul 2017 15:24

£38116+£60006 = £98122 - £11100 = £87022

£5000 @ 0% Dividends rate
£4984 @ 7.5% Dividends rate
£27016 @ 20% Basic rate
£50022 @ 32.5% higher dividends rate

That is what I get!

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By Wanderer
19th Jul 2017 15:31

.

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By MGD
19th Jul 2017 15:33

thank you very much for this. Much appreciated

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By MGD
19th Jul 2017 15:36

Thank you very much. Much appreciated. I just emailed the tax lecturer whose seminar I attended and if he says anything different I will let you know

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By Wanderer
19th Jul 2017 16:10

Is that correct though? You have allocated all PA to non dividend income.

If that is done isn't the £5,000 dividend allowance the first part of the dividends & therefore utilises £4,984 of the basic rate band then £16 of the higher rate band?

I think best result is by allocating PA part to non dividend & rest to dividends giving:-
£32,000 @ 20%
£5,000 @ 0%
£50,022 @ 32.5%

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By MGD
19th Jul 2017 16:14

I disagree because £32K includes dividend income which is not taxed at 20% . This is what my software does and I disagree

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By Wanderer
19th Jul 2017 16:21

I do see where you are coming from but think your understanding is wrong.

Allocating all the PA against non dividend income effectively uses some of the 0% band against something which would only be taxed at 7.5%.

Partially allocating the PA against non dividend income effectively allows you to use the whole £5,000 0% band against something which would otherwise be taxed at 32.5%.

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By Shreeveuk
19th Jul 2017 16:24

Is your software splitting the personal allowance so £6,016 of it is being used against non-dividend income and the balance of £4,984 is being used against the dividend income (£60,006 - £4984 = 55,022).

32,000 @ 20% (£38,116 - £100 - £6,016)
5,000 @ 0% (Dividend allowance)
50,002 @ 32.5% (£55,022 - £5,000)

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By Wanderer
19th Jul 2017 16:27

That's what I'd do!

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By Portia Nina Levin
19th Jul 2017 16:30

Which produces a higher tax liability than that put forward by craigisby, since you are taxing £4,984 at an extra 22.5%, surely?

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By Wanderer
19th Jul 2017 16:31

You can't choose to have 4,984 @ 7.5% then 5,000 @ 0%.

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By Portia Nina Levin
19th Jul 2017 16:44

Ah! I hadn't spotted that that was what had been done!

In which case, I agree with your version!

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Replying to Wanderer:
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By MGD
19th Jul 2017 21:09

agree

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Replying to Portia Nina Levin:
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By Shreeveuk
19th Jul 2017 16:39

I am not sure how that has happened in the craigsby post to be honest. £27,016 of non dividend income leaves only £4,984 of a normal £32,000 BRB (unless we have somehow got another £5,000 to play with from pension etc).

So in my head (which can certainly be wrong) the £4,984 is at 0% along with another £16 in the HRB leaving £55,006 to be taxed at 32.5%

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By MGD
19th Jul 2017 16:42

I agree with you. This is what I did

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By Portia Nina Levin
19th Jul 2017 16:44

Indeed!

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By MGD
19th Jul 2017 21:08

no it is offsetting the full Pa against total income which is wrong

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By SteveHa
19th Jul 2017 16:20

I agree this one. That's what I got.

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By Cheshire
19th Jul 2017 16:28

Me too

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By Portia Nina Levin
19th Jul 2017 16:31

Producing £1,121.40 more tax for the exchequer.

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By Matrix
19th Jul 2017 16:07

But the dividend allowance uses up the BRB so there is no dividend taxable at 7.5%, all dividends after deducting the dividend allowance fall in the HRB don't they?

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By MGD
19th Jul 2017 16:15

That is exactly what I think. Thank you very much but not according to the software

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By Portia Nina Levin
19th Jul 2017 16:45

No that' b0llox. The first £5,000 of taxable dividend income is taxable at 0%, rather than the rate at which it would otherwise be charged.

EDIT: Ignore me!

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Replying to Portia Nina Levin:
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By MGD
19th Jul 2017 16:39

Thank you all very much for your comments. Very much appreciated but I still don't know which is the correct answer.

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By Matrix
19th Jul 2017 16:44

But I thought that the dividend allowance relieved tax at lower rates first so to the extent there is a dividend in the BRB then this uses up the band? I didn't say the £5k was taxable. I am sure there was debate about this last year.

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By Wanderer
19th Jul 2017 16:47

So what you do is allocate the PA in such a way as to leave all the dividend in the higher band then use the £5,000 0% band against some of this.

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By MGD
19th Jul 2017 21:11

it is not a choice you have to use PA against non taxable income first

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By Wanderer
20th Jul 2017 04:39

MGD wrote:

it is not a choice you have to use PA against non taxable income first


What a ridiculous statement to make!
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By Portia Nina Levin
19th Jul 2017 16:55

Yes, I let craigisby's calculation confuse me!

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By MGD
19th Jul 2017 17:02

I tend to agree with you

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By Wanderer
19th Jul 2017 16:45

Well it seems we have:-

MGD
Craigsbisby
thinking one thing.

&
Wanderer
Shreeveuk
Stelaca
Cheshire
Matrix
Portia
thinking differently.

What ever happened to tax simplification?

Must admit it took me an age to work out what was wrong with Craigsbisby’s logic.

edited now as Portia has changed his / her mind!

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By MGD
19th Jul 2017 17:05

I'm still not sure what the correct answer is. I have emailed a lecturer and asa I hear I will let all of you know.
Thanks a lot for your comments

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By Wanderer
19th Jul 2017 17:13

It's £22,657.15 :).

I think that the fundamental problem is we are all used to allocating allowances against employment etc. income first. The £5,000 0% band & the ability to allocate allowances in the most beneficial way brings a whole new set of calculations into the game.

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By Cheshire
19th Jul 2017 17:39

Actually I agree with Matrix in part in that the divi allowance uses up part of a tax band (be it BR or HR) and my calc comes out at £23279. As follows:-
- Non divi income £38116 - pa 11100 = £27016 @ 20% = £5403.

This leave £4984 of the B/r band to be used up (£32k basic band - 27016). BUT the balance of the b/r band is actually used by the £5000 divi allowance, taxed at 0%.

So balance of divis £60006 - 5k divi allow = £55006 at 32.5% = £17876

Total tax £5403 & £17876 = £23279.

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By Wanderer
19th Jul 2017 17:45

Why are you wasting some of the 0% band against something which would be taxed only at 7.5%??

Allocate the allowances in the most beneficial way & you can use the 0% band against something which would be taxed at 32.5%

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By MGD
19th Jul 2017 21:16

This is my query. I don't think you can do that.

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By Cheshire
19th Jul 2017 21:39

Despite my earlier numpty brain issue and forgetting to check fact v HMRC fiction, Wanderer is spot on.

Have a look at the Income Tax act itself, section 25(2), which states-

'deduct the reliefs and allowances in the way which will result in the greatest reduction in the taxpayer's liability to income tax'

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By Wanderer
20th Jul 2017 04:46

MGD wrote:

This is my query. I don't think you can do that.

Section 25(2) ITA 2007 says you can.
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Replying to Cheshire:
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By MGD
19th Jul 2017 21:15

isn't the dividend allowance restricted to £4984, the remaining BRB? ie £4984 at 0%

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By Cheshire
19th Jul 2017 21:41

No, because the £5k divi allowance rate of is available in full to all taxpayers.

See Wanderers worked example near the bottom of this thread.

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Replying to MGD:
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By Wanderer
20th Jul 2017 04:54

MGD wrote:

isn't the dividend allowance restricted to £4984, the remaining BRB? ie £4984 at 0%


There isn't a remaining BRB if you allocate the allowances properly.
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By Cheshire
19th Jul 2017 17:56

But doesnt the £5k divi allowance only cover the FIRST £5k of divis? Per eg 6
https://www.gov.uk/government/publications/dividend-allowance-factsheet/...

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By Wanderer
19th Jul 2017 18:01

Allocate the £11,100 as £6,116 against non dividends & £4,984 against dividends.

This gives:-
Non dividends £38,116 - £6,116 = £32,000
32,000 @ 20% = £6,400

Dividends £60,006 - £4,984 = £55,022
£5,000 @ 0% = £0
£50,022 @ 32.5% = £16,257

Total £22,657

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By Cheshire
25th Jul 2017 14:24

Ah right, yes. Being a numpty. You will be pleased to learn I dont do personal tax! I am a 'mere' bookkeeper! Thank you though, I like to learn.

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By Wanderer
19th Jul 2017 18:18

You're not a numpty, example 6 is wrong!

The LAW says:-
(2)At Steps 2 and 3, deduct the reliefs and allowances in the way which will result in the greatest reduction in the taxpayer's liability to income tax.

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