Dividends and taxation of state pension lump sum

The impact of dividends on the taxation of the state pension lump sum

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Not sure if this an anomoly or the way it should be.

If tax payer has 5,500 of say rental income plus 5499 of dividend income and a state pension lump sum of 20,000. 4,000 of tax was deducted from the state pension lump sum payment  initially but on the SATR you can reclaim the 4,000 as the taxpayers marginal rate was NIL.

If the dividend however was 5501 then it would appear the 4,000 cannot be re-claimed even though the tax payer is still a non tax payer because of personal allowances/dividend allowances. At least that is what our software is showing.

So the extra £2 of income makes 4,000 difference to the tax bill.

Is this correct?

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By Tim Vane
22nd Jan 2018 17:13

Yes, the pension lump sum is taxed at the marginal rate of the other income. So if the PA covers the other income then the marginal rate is zero. If the income exceeds the PA by £1 then the marginal rate is 20%. This is a perfect example of why it is a good idea to have tax planning.

The dividend allowance has no affect on the rate charged so can be ignored.

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