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How much tax is due on £20k int + £20k dividends?

I do not agree with the 17/18 calculation my software gives nor the software a friend uses.

I thought I knew the answer but my confidence has been dented by two separate software programs giving the same answer being £2,437.50 when I am of the opinion that it should be £1,625.

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23rd Apr 2018 17:57

I haven't done any sums but....

£1,625 + 50% Payment on account = £2,437.50

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By Wally
to Adam12345
25th Apr 2018 11:00

Thanks Adam12345 for responding,
This would appear to be just a coincidence, there wasn't any PoA in my calculation.
Best wishes,
Wally

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23rd Apr 2018 18:26

My software is saying £2,437.50.

I can see how you've got to £1,625.00 though by allocating whole of PA against interest and then using both the £5,000 & £1,000 0% bands.

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23rd Apr 2018 18:30

I understand that for 2017/18 there are some very simple income combinations that are not flagged as exclusion cases yet HMRC's 2017/18 calculation handles them incorrectly. Two examples shown to me were: (1) interest £15k, dividends £30k; and, (2) interest £30k, dividends £15k. Your example gives tax of £1,625 when all the PA goes against the interest.

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24th Apr 2018 08:43

Taxfiler sets £5000 against the interest and £6500 against dividends.

That saves dividend tax at 7½% on £6500 but at the cost of paying 20% on £6500 of interest.

Your difference is £6500 @ 12½%.

Baffling.

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to lionofludesch
24th Apr 2018 09:15

BTC does exactly the same.

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By rhino83
to lionofludesch
24th Apr 2018 09:52

I've just done the same one on IRIS.

It allocates the PA exactly the same way.

Baffling indeed.

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By John R
to lionofludesch
24th Apr 2018 10:57

Sage personal tax likewise £2,437.50 and no payments on account due!

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By John R
to John R
24th Apr 2018 12:18

Now showing £2,437.50 plus £1,218.75 interim, now that I have ticked the "Do not collect through PAYE" box.

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to lionofludesch
24th Apr 2018 11:07

Computers - they're the future, aren't they ?

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24th Apr 2018 11:28

Digita gives £1625.00...

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to sonoftwosheds
24th Apr 2018 11:38

Interesting.

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By John R
to sonoftwosheds
25th Apr 2018 13:42

If it is true that the software companies have to obey HMRC's instructions as to the programming of their tax calculation software, how is it that Digita's calculation is correct (see earlier post by sonoftwosheds)? Or will the return be rejected if submitted online?

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24th Apr 2018 12:04

CCH - £2,437.50 + 1st POA of £1,218.75

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24th Apr 2018 12:19

Keytime also gives a figure of £2,437.50 but I agree with the £1,625 calculation.

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24th Apr 2018 12:30

Wally wrote:

I thought I knew the answer but my confidence has been dented by two separate software programs giving the same answer

The same answer to a different question? £1,625 is the tax liability on the figures you give - but what do the programs say the £2,437.50 is? Maybe the first payment due as a result of that liability?

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24th Apr 2018 12:35

Taxcalc also produces £2,437.50. It also provides a warning note that all or part of the PA has been used against dividend income in priority to non-savings income as it is more beneficial and reduces the income payable. Baffling since only savings income is included (interest and dividends). Perhaps it's another glitch provided by HMRC, since all software houses have to follow the code provided, or be rejected when filing is attempted

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By ClaireB
24th Apr 2018 13:50

Isn't the £5,000 starting savings rate reduced because the dividend income (after allowance) is greater than £11,500.

So I don't think £1,625 is the right answer whichever way you cut the PA.

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to ClaireB
24th Apr 2018 14:10

Well, Taxfiler gives the full £5000 starting rate of 0%, so, no, that's not the answer.

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24th Apr 2018 14:12

Response from Taxfiler

"Thank you for this. Another client did come up with this and the developers agreed that this seems to be incorrect, however if we fixed this then the tax returns would be unable to be used with HMRC.

"I have drawn this matter to HMRC's attention a couple of weeks ago and have not yet had a substantive response. I will let you know of any more developments."

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24th Apr 2018 17:22

The 2017-18 HMRC calculator is copied by most of the tax return software developers. Unfortunately the HMRC calculator appears to have a number of errors similar to (but different from) the errors that plagued the 2016-17 calculator.
Try the following in your own software and post the results:
Example 1 Salary £11,000, Interest £7,000 Dividends £16,000. Correct tax is £925.00. HMRC make it £987.50.
Example 2 Salary £50,000, Sole trade profit £12,000. The tax is right but the Class 2 should be £88.35 and the Class 4 £76.72. HMRC make it Class 2 £0 and Class 4 £76.72.
Example 3 Salary £10,000, dividends £8,000, UK chargeable event gain £10,000. Correct tax is £1,725 less £1,200 = £525. HMRC make it £2,000 less £2,000 = Nil

Thanks (3)
to Tim Good
24th Apr 2018 16:29

Tax doesn't have to be taxing, Tim.

Unfortunately, UK tax is run by HMRC.

How are the Scottish rates holding up ?

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to Tim Good
24th Apr 2018 16:52

Tim Good wrote:

The 2017-18 HMRC calculator is copied by most of the tax return software developers. Unfortunately the HMRC calculator appears to have a number of errors similar to (but different from) the errors that plagued the 2016-17 calculator.
Try the following in your own software and post the results:
Example 1 Salary £9,000, Interest £7,000 Dividends £16,000. Correct tax is £925.00. HMRC make it £987.50.
Example 2 Salary £50,000, Sole trade profit £12,000. The tax is right but the Class 2 should be £88.35 and the Class 4 £76.72. HMRC make it Class 2 £0 and Class 4 £76.72.
Example 3 Salary £10,000, dividends £8,000, UK chargeable event gain £10,000. Correct tax is £1,725 less £1,200 = £525. HMRC make it £2,000 less £2,000 = Nil

1. £712.50 - with PA being split £9000 salary, £1000 interest, £1500 dividends.

2. £148.20 Class 2 + £345.24 Class 4

3. £725.

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to lionofludesch
24th Apr 2018 17:20

My bad! I transposed two of my examples, Example 1 should have read Salary £11,000, interest £7,000, dividends £16,000.

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to Tim Good
24th Apr 2018 19:43

And there I was, poised with my tonne of bricks, Tim !

My "brute-forcer" agrees with your amended examples.

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to Tim Good
25th Apr 2018 07:21

Tim Good wrote:

My bad! I transposed two of my examples,

Tut, tut.

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By John R
to Tim Good
24th Apr 2018 17:32

Sage:
Ex 1 - £712.50 (Edit: £987.50 following Tim's correcting post)
Ex 2 - Class 2 not calculated, Class 4 £76.72
Ex 3 - £1,912.50 less £2,000 = nil

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By John R
24th Apr 2018 16:50

As the total income exceeds the higher rate threshold by £6,500 and this is the amount of allowance that is allocated against dividends, could there be a connection?
I have reworked the calculation with £21,000 for each source, making £8,500 in excess of HR threshold and Sage allocates the PA £8,500 to dividends and £3,000 to savings income. The software therefore seems to be calculating the liability on the basis that the income BEFORE PAs above the HR threshold, determines the part of the PA that must be allocated to dividends. Are others aware of any legislation that states this?

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to John R
24th Apr 2018 17:04

It's not over the higher rate threshold, though, is it ?

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By John R
to lionofludesch
24th Apr 2018 17:34

Indeed.

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to John R
24th Apr 2018 17:43

John R wrote:
income BEFORE PAs above the HR threshold, determines the part of the PA that must be allocated to dividends. Are others aware of any legislation that states this?

No!
Legislation actually 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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24th Apr 2018 17:12

Since you asked ...
Try Scottish salary £45,000, Interest £5,500 and dividends £100,000. I make it tax of £44,803 but HMRC make it £44,915.
Or salary £32,000, interest £6,600, dividends £18,500. I make it tax of £8,907.50 but HMRC make it £8,945.00.
Or Salary £33,000, interest £8,000, dividends £108,000.
I make it tax of £43,375 but HMRC make it £43,403 (including tax at 38.1% on £500 of dividends even though not above £150,000 in total!).

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to Tim Good
24th Apr 2018 17:49

Taxfiler agrees with HMRC.

That 38.1% rate is just weird on total income of £149,000.

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By Wally
to Tim Good
25th Apr 2018 11:28

Morning Tim (Mr Good),
You won't know me as Wally, however there may have been many times in your Bristol Lectures that you were thinking it.
It is nice to have your response, I thought that the overriding instruction was for the Personal Allowance to be able to be used to the taxpayers' advantage, so why are so many software providers failing to get this right when they did for 16/17?

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to Wally
25th Apr 2018 11:40

Wally wrote:
.... so why are so many software providers failing to get this right when they did for 16/17?

Because they have to code in accordance with HMRC's instructions.
As the errors start to appear out of the woodwork then the software vendors:-
Firstly highlight the issue and advise it's one of the online filing exclusions.
Secondly when (if) HMRC amend their ropey calculations update the software so it is in accordance with both the law & HMRCs calculations.
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24th Apr 2018 20:02

Again - results agreed, Tim.

How can HMRC get what are very simple core processes so wrong?

Perhaps the staff have been moonlighting over at TSB.

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25th Apr 2018 11:44

I remember getting pelters a few years ago when I said I worked the tax out by hand before entering up the Tax Return. "Rely on the software," people told me. "Don't waste your time."

Over the last twelve months, I feel increasingly vindicated.

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By John R
to lionofludesch
25th Apr 2018 13:41

We routinely check our tax return software calculations with Absolute Accounting's Taxpert software which is produced by Tim Good and which seems to be accurate although even this has to be amended through the year as anomalies become apparent.

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to lionofludesch
25th Apr 2018 16:20

Lion, I don't think anyone should criticise you for working out the tax by hand but can you really be confident that your manual calculation is correct, given all the complexities in the current system? Out of interest, how do you go about manually calculating the optimum allocation of the personal allowance?

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to richardcollett
25th Apr 2018 16:43

richardcollett wrote:

Lion, I don't think anyone should criticise you for working out the tax by hand but can you really be confident that your manual calculation is correct, given all the complexities in the current system? Out of interest, how do you go about manually calculating the optimum allocation of the personal allowance?

Well, firstly, it was more about checking that I'd made all the entries correctly. If I've already calculated the answer and I find the software's answer is different, I can find the difference. Could be my error, could be the software.

Secondly, I use a three column approach, non savings, savings and dividend. It helps you see where the best allocations are. Once you've done a few, you improve your guessing success and I get it right first time around 80% these days. You can test your guess by moving £1 of personal allowance around and see what happens. If it reduces the tax by a few pence, try moving £100 or £1000.

It's very intuitive. We used to do this all the time before software and calculators. I'm a big believer in knowing what the software does.

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25th Apr 2018 16:24

More from Taxfiler ...

"I've just received confirmation from HMRC that their calculator is not calculating the most beneficial ordering for customers when the non-savings income such as employment is less than the personal allowance and the taxable income is less than £33,500 and when the savings and dividends income are both above the respective nil rates.

"They have created an exclusion for this and aim to fix the main program for the 2018/19 tax year."

So they've already given up on 2017/18.

Do HMRC not have some input into tax rates ? Do they never think to say to Phil Hammond "this is too hard for us"?

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to lionofludesch
25th Apr 2018 17:03

"Do HMRC not have some input into tax rates ?"

HMRC tell me that they are not consulted.

The point is though, that whilst this would be a good idea as a means of ensuring that unimplementable demands are not made - we are in no way anywhere near such a situation. From the legislation, SA 2018/19 is a very simple process to define and implement. Even after HMRC's interpretations of the legislation it is still pretty simple.

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