I've just done a tax return for one of my clients on HMRC Online where it seems to have treated bank interest incorrectly. It seems to have allocated it to the basic rate band, thus nudging taxable dividends into the higher rate band. Figures as follows:
- Salary - £8,160
- Office rent - £1,500
- Less rental exps - £208
- Dividends - £35,798
- Bank interest - £37
- Gift Aid - £200 net
Total income is therefore £33,787 and the adjusted higher rate threshold is £33,750.
You can order your income in the most tax efficient way, so although bank interest would normally come before dividends in the queue to be taxed, in this case it should come after, so the dividends all fall into the basic rate band whilst the interest is still sheltered by the £500 PSA. The software should do this automatically. Yet HMRC Online shows £37 dividends being taxed at 32.5%.
It seems to have messed up on my own tax return too, as it allocated dividends to what was left of my personal allowance after salary and rent in preference to interest over and above the tax-free £6k, thus pushing the tax bill up another £36.
Have I missed something here or are there still gremlins in the HMRC systems? I thought all these glitches were supposed to have been sorted out last year.
Replies (8)
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You cannot "order your income in the most tax efficient way". There is still a fixed order of taxation.
You have the right to distribute personal allowances in the most tax efficient way.
Here's the latest, 20/07/2018, details of the 2017/2018 problems, there's only 25 pages of them:-Have I missed something here or are there still gremlins in the HMRC systems? I thought all these glitches were supposed to have been sorted out last year.
http://admin.btcsoftware.co.uk/download/2018-exc-indi-latest.pdf
I agree with the replies above.
There are lots of problems with the HMRC computation, but in this case it would get the correct answer.
I suspect your own tax return is also correct, as you appear to misunderstand the rules.
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It's really worrying that software firms can get this right but HMRC couldn't for 2 years in a row now. Maybe it's all part of some dastardly plan to privatise the taxman. Well, the private sector could hardly do worse!
If only. Many commercial solutions have reproduced the errors HMRC have made in issue after issue of their specifications. Blindly following HMRC specs adds little value, just as practitioners who blindly use the resulting software without doing a "sanity check" calculation add little value.
The more complex the changes to tax legislation the more this lack of added value has been exposed. Perhaps we are past "peak change" and so the exposure will diminish. Whatever, there will still be the fundamental misunderstanding cases - like this one.
Dividends are always the top slice after you have used the personal allowance as tax efficiently as possible.