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Dividends: Tax Faculty issues updated workings

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21st Aug 2015
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Following last week’s early preview of the Treasury’s plans for the proposed £5,000 dividend tax allowance, Rebecca Benneyworth has posted updated workings on the ICAEW Tax Faculty’s website.

In preparation for a faculty webinar on the subject, Benneyworth and ICAEW technical officer Anita Monteith asked the Treasury if they could clarify how the rules will work.  The Treasury obliged and HMRC has subsequently issued its dividend allowance factsheet.

The tax credit currently applied will be abolished in the 2016 and from that point dividend income will no longer be grossed up in the personal tax computation.

In its place will be a £5,000 dividend tax allowance. This will not reduce the taxable income, but will act instead as a nil rate band applying to the first £5,000 of taxable dividend income.

Any dividend income over and above the first £5,000 is taxed as if the £5,000 has used up either basic rate band or higher rate band. Dividends will then be liable to tax at 7.5% in the basic rate band, 32.5% in the higher rate band and 38.1% in the additional rate band.

As Benneyworth explained last week, the new savings allowance of £5,000 (2015) is not available against dividend income – only interest and similar and the personal tax savings allowances planned for 2016 will not be available against dividends.

According to Benneyworth, the key difference from her initial analysis in AccountingWEB’s TaxCalc-sponsored Summer Budget report is that the relief will apply at the lower tax rate and adversely affect higher rate taxpayers taking large sums in dividends. Here’s a comparison of the new regime with the existing arrangements for someone earning a basic salary of £8,000, and taking another £40,000 in dividends:

2015/16

2016/17

Salary

8,000

8,000

Dividend income

40,000

40,000 

Plus tax credit

4,444

52,444

48,000

Less : Pers allowance

10,600

11,000

Taxable income

41,844

37,000

Tax at

10% on

31,785

3,178

0% on

5,000

0

32.5% on

10,059

3,269

7.5% on

27,000

2,025

32,000

Less tax credit

4,184

32.5% on

5,000

1,625

Tax due

2,263

3,650

Note that the taxable dividend is £37,000, which is tested against the higher rate limit before applying the dividend allowance. Doing so establishes that £5,000 is therefore taxable at higher rate. The dividend allowance forms part of the basic rate band of £32,000, and is therefore worth £5,000 x 7.5% = £375.

The Tax Faculty paper offers a wider set of worked examples, but the conclusion for Benneyworth is clear. The proposed system will add £2,000-£4,000 to the bills for limited company owners taking most of their remuneration out as dividends. But her view that it wouldn’t be worth incorporating profits less than £40,000pa due to the additional administrative costs.

“Loads of dividends will not be sensible with the allowance,” she said. “But there isn’t a pat answer. You need to tailor your advice to clients and their financial situations.”

Replies (9)

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By DerekChaplin
24th Aug 2015 11:02

Can HMRC add up?

Is it me or do examples 3 and 4 not really work on the HMRC Factsheet?

Example 3

“I have a non-dividend income of £6,500, and a dividend income of £12,000 from shares outside of an ISA”

With a Personal Allowance of £11,000, £7,500 of the dividends are under the threshold for tax. A further £5,000 comes within the Dividend Allowance, leaving tax to pay at Basic Rate (7.5%) on £2,500.

£6,500+£7,500 = £14,000, not £11,000 or £7,500+£5,000+£2,500 = £15,000 dividends.

Example 4

“I have a non-dividend income of £20,000, and receive dividends of £6,000 outside of an ISA”

You won’t need to pay tax on the first £5,000 of dividends due to the Dividend Allowance, but will pay tax on £1,000 of dividends at 7.5%.

This one doesn't mention what happens to the £20,000 non-dividend income, whereas example 5 then goes on to say what happens when non-dividend income is only £18,000!

 

If this example should read £2,000 non-dividend income, does that mean that the balance of £1,000 over the dividend allowance is not covered by the personal allowance?

 

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Replying to dmmarler:
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By partner55
24th Aug 2015 12:07

HMRC examples are fine

Example 3

£6500 + £12000 = 18500 less 11000 personal allowance = 7500 taxable.

As dividends are top part of income, this £7500 is all dividends.

First 5000 at 0%, leaving £2500 at 7.5%

Example 4

Taxable non-divi income = 20000 less 11000 = 9000, taxable as normal, no change, not mentioned

Divi income = 6000, of which £5000 is at nil % leaving £1000 at 7.5%.

 

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Replying to dmmarler:
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By YvonneDrum
24th Aug 2015 12:11

HMRC not very clear

I think the sums do add up. The factsheet is just not very clear as to what gets first priority: the personal allowance or dividend allowance.

Example 3

The personal allowance is used first on the non-dividend income leaving £11,000 - £6,500 = £4,500 personal allowance. Deducting this from the dividend income £12,000 - £4,500 = £7,500 is taxable. The dividend allowance can then be applied to this: £7,500 - £5000 = £2,500. Therefore tax would be paid at 7.5% on this £2,500

Example 4

The personal allowance would be used first on the non-dividend income: £20,000 - £11,000 = £9,000 of the non dividend income will be taxed at basic rate.

There is no personal allowance available to be offset against the dividend income this time. The dividend allowance is deducted £6,000 - £5,000 = £1,000 which will then be taxed at basic rate.

 

If this example should read £2,000 non-divided income then there would be personal allowance available as per example 3

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Replying to asillahi:
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By DerekChaplin
24th Aug 2015 15:38

The problem is...

Yvonne Drum - my problem is that the answer you have for Example 4 is pretty much what they say for example 5, so why bother with example 4 at all? especially as they ignore the tax treatment of the £20k completely in Ex.4 but properly explain it for £18k in Ex.5??

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Replying to dmmarler:
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By Red1960
24th Aug 2015 13:58

Dividend Allowance

DerekChaplin wrote:

Is it me or do examples 3 and 4 not really work on the HMRC Factsheet?

Example 3

“I have a non-dividend income of £6,500, and a dividend income of £12,000 from shares outside of an ISA”

With a Personal Allowance of £11,000, £7,500 of the dividends are under the threshold for tax. A further £5,000 comes within the Dividend Allowance, leaving tax to pay at Basic Rate (7.5%) on £2,500.

£6,500+£7,500 = £14,000, not £11,000 or £7,500+£5,000+£2,500 = £15,000 dividends.

This looks like a literacy issue.

What exactly is meant by "£7,500 of the dividends are under the threshold for tax"?

If you interpret "under threshold" as "within the charge to tax" all becomes clear.

Noted the "fact sheet" describes the dividend tax as "This simpler system..."!

If HMRC are struggling perhaps this proposal should be aborted.

Shambolic...

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By DerekChaplin
24th Aug 2015 13:18

Thanks

Much appreciated clarification. I was reading "under the threshold for tax" as under the personal allowance, not "chargeable to tax"

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By Peter Kilvington
24th Aug 2015 13:30

Mortgages

This one is a bit off topic but I was wondering if any one has knowledge on how this will impact on mortgages as the tax credit is no longer "included in pre-tax income".

I am completing a re-mortgage of 6 buy to let properties at the moment and the level of gross income (including the dividend tax credit) has been important during this process. 

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By C.Y.Nical
25th Aug 2015 17:06

45% marginal rate under new Dividend Tax

Under the new dividend tax rules I thought the marginal tax rate on additional income for most taxpayers would be 32.5%. But my worksheet suggests a 45% marginal rate on non-dividend income. See the screenshot (I don't know how to attach the actual spreadsheet). I am ignoring National Insurance at this stage.

My figures assume:

a taxpayer who has employment, trade, pension etc. income ("non-dividend income") above the personal allowancedividends which take the total taxable income above the higher rate threshold but not as far as the additional rate threshold.

This is not an uncommon set of circumstances - it actually applies to me!

Changing the figures doesn't seem to alter the result much so long as the above parameters stay the same.

In my example non-dividend income increases by £5,000 which is less than 13% of previous total taxable income. But tax payable increases from £6,050 to £8,300 - an increase of £2,250 which is 45% of the extra income.

I'd be really grateful if someone would check my workings. The explanation is that the extra income of £5,000 is taxed at 20% but it pushes the same amount of dividend income out of the 7.5% band into the 32.5% band - an increase of 25% - so you could say that the extra non-dividend income of £5,000 is taxed twice, and the two tax rates take 45% of the extra income.

Perversely, an increase of £5,000 in dividend income while leaving the non-dividend income the same results in a marginal rate of 32.5%.

If I am right George Osborne's new tax penalises the receipt of non-dividend income in favour of dividends unless National Insurance enters the picture.

Link to worksheet: http://s613.photobucket.com/user/boards/media/Dividend%20Tax%20screenshot_zps5gdu1jyw.jpg.html

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By djtax
13th Oct 2015 12:46

what about corporate shareholders?

Does anyone know how the new dividend rules would affect receipt of dividends by a company (eg parent company receiving dividends from  subsidiary) - will the abolition of the old notional tax credit have any relevance? Will a corporate shareholder benefit from the £5000 new allowance? Or was there something in the Budget I missed retaining the status quo of tax neutrality for dividends paid across a group structure under Corporation Tax rules?

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