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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Where are you getting that from?My understanding is that the dividend allowance is restricted to the BR band
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.
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?
£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!
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%
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%.
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)
Which produces a higher tax liability than that put forward by craigisby, since you are taxing £4,984 at an extra 22.5%, surely?
Ah! I hadn't spotted that that was what had been done!
In which case, I agree with your version!
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%
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?
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!
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.
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.
it is not a choice you have to use PA against non taxable income first
What a ridiculous statement to make!
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!
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.
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.
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%
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'
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.
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.
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/...
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
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.
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.