Dividends: Tax Faculty issues updated workings
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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?
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%.
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
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??
Dividend Allowance
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...
Thanks
Much appreciated clarification. I was reading "under the threshold for tax" as under the personal allowance, not "chargeable to tax"
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.
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
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?