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IRIS producing overstated tax liablities?

Is IRIS overstating this clients tax liability by splitting the personal allowance with dividends?

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

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15th Nov 2018 15:23

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.

Thanks (1)
15th Nov 2018 15:26

Duggimon is right. Doing it your way the tax is £6,381.95

Thanks (1)
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15th Nov 2018 15:39

Thanks guys, so simple I'm not sure where that threshold came from but I had a feeling it was going to be something obvious. I've just re-checked everything and you are both correct. Thank.

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12th Jan 2019 12:50

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.

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to milo1989
12th Jan 2019 13:27

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.

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to Tim Vane
12th Jan 2019 13:43

Ah, I miss understood the dividend allowance as I was adding it onto the basic rate band.
Thank you for the reply and clarifying.

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