Hi all,
One of my colleagues has produced a Personal Tax return for a client using IRIS and queried with me why none of the income was taxed at the Higher Rate. Immediately I knew the answer, it was becuase IRIS was allocating some dividends into the Personal Allowance to be more tax efficient, but from what I can gather that appears to be only partialy correct.
The client in question has a pretty basic 2017/18 tax return, £37,835 in salary and £10,096 in Dividends. IRIS has calcualted the tax laiblity like this:
Non-Savings Savings Dividends
Salary 37,835
Dividends 10,096
Less: Personal Allowance (6,404) (5,096)
Taxable Income 31,431 5,000
Tax £
31,431 @ 20% Basic Rate 6,286.20
5,000 @ 0% Basic/Higher Rate NIL
Tax Liability 6,286.20
When doing a manual calcualtion of this and how the Personal Allowance may normally be allocated, I discovered that allocating all of the Personal Allowance in this instance created a smaller liability, like this:
Non-Savings Savings Dividends
Salary 37,835
Dividends 10,096
Less: Personal Allowance (11,500)
Taxable Income 26,335 10,096
Tax £
26,335 @ 20% Basic Rate 5,267
5,000 @ 0% Basic Rate NIL
3,515 @ 7.5% Basic Rate 263,63
1,581 @ 32.5% Higher Rate 513.82
Tax Liability 6,044.45
There is a difference of £241.75 in favour of my own calcualtion.
I have driven myself stupid checking this as basic as it is because IRIS would normally be correct, so I emailed IRIS to ask them to look into it. They have replied but only provided a breakdown of their calcualtion, which I already had, so I am again awaiting their response. It looks like in this case, losing the dividends taxed at 7.5% for salary at 20% is a greater loss than the gain received for switching the higher rate Dividends for salary at 20%.
Wthout wasting too much of your own time on this, am I missing something ridiculously obvious or have I stumbled onto something IRIS does wrong?
Thanks in advance and apologies for the awkward formatting, I couldn't get everything to align properly.
Replies (6)
Please login or register to join the discussion.
I think you're using the wrong amount for the basic rate band.
I get £6381.94 by applying 100% of the PA to the salary.
Hi
Please can I clarify something...
I make the following calculation:
26,335 x 20% = 5,267.00
5,000 x 0% = 0.00
5,096 x 7.5% = 382.20
Therefore the tax liability should be £5,649.20?
The basic rate band for 17/18 is 33,500 so after taking off the personal allowance and dividend allowance, the taxable income falls within the basic rate band?
I am having an issue with Iris in that it is splitting the personal allowance in a way that I feel is incorrect and making a tax liability £600 more than it should be..
I may be missing something here so any help would be greatly appreciated.
Well, what you are missing is that 26,335 + 5,000 + 5,096 adds up to £36431, which is £2,931 more than £33,500. The point is that you don't "take off" the dividend allowance, it just reduces the tax charge on the first £5,000 of dividends.
So £2,931 should be taxed at 32.5%, which makes the tax bill £6,381.94. The IRIS calc will optimise the PA to reduce the bill.
Ah, I miss understood the dividend allowance as I was adding it onto the basic rate band.
Thank you for the reply and clarifying.