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  • FIRST POST
    • polymaff
    • By polymaff 8th Apr 17, 8:17 PM
    • 1,610Posts
    • 683Thanks
    polymaff
    A simple, visual model of 2016/17
    • #1
    • 8th Apr 17, 8:17 PM
    A simple, visual model of 2016/17 8th Apr 17 at 8:17 PM
    See post #8
    Last edited by polymaff; 09-04-2017 at 7:12 PM.
Page 4
    • Dazed and confused
    • By Dazed and confused 19th Apr 17, 9:52 PM
    • 1,596 Posts
    • 681 Thanks
    Dazed and confused
    Ok, my stab at this is we have £117,500 which needs to be taxed after the small amount of personal a allowance due is allocated against the a employment income and the traditional calculation would be

    £15,500 x 20% = £3100 (employment)
    £500 x 0% = £0 (personal savings allowance)
    £11500 x 20% = £2300 (balance of savings income)
    £5000 x 0% = £0 (dividend allowance)

    That has now used up all of your basic rate band (PSA and dividends allowance use this a up if within the standard basic rate band) and the remaining dividends are all then taxable at the dividend higher rate
    £85,000 x 32.5% = £27,625

    Total due is 3100 + 0 + 2300 + 0 + 27625 = £33025

    Now to have a think about the potential alternative for 2016:17!!
    Last edited by Dazed and confused; 19-04-2017 at 9:58 PM.
    • bigadaj
    • By bigadaj 19th Apr 17, 10:44 PM
    • 9,574 Posts
    • 6,095 Thanks
    bigadaj
    Not sure on the tax calculation issue but the 60% tax relief on pension contributions on salary looks attractive, though much of this may well be paid at some time in the future if income levels remain the same.
    • grey gym sock
    • By grey gym sock 20th Apr 17, 1:11 AM
    • 4,049 Posts
    • 3,520 Thanks
    grey gym sock
    Employment £17,000
    Savings Interest £12,000
    Dividends £90,000
    Total = £119,000
    Personal allowance reduced from £11,000 to £1,500
    Basic Rate = £32,000

    HMRC and Andica calculate tax due as
    Employment £15,500 @ 20% = £3,100
    Savings £500 @ 0% + £11,500 @ 20% = £2,300
    Dividends £5,000 @ 0% + £5,000 @ 7.5% + £80,000 @ 32.5% = £26,373
    Total tax = £31,775
    Originally posted by Richard 1963
    hmmm ... that calculation appears to be using a basic rate band of £37,500 (i.e. £15,500 + £500 + £11,500 + £5,000 + £5,000) ... which would be correct if you have £5,500 of pension contributions and/or gift aid (since they widen the basic rate band) ... and IMHO, if that widening of the BR band is correct, then that calculation is the right answer.

    Alternative
    Dividends £5,000 @ 0% + £32,000 @ 7.5% + £53,000 @ 32.5% = £19,625
    Employment £0 @ 20% + £15,500 @ 40% = £6,200
    Savings £500 @ 0% + £11,500 @ 40% = £4,600
    Total tax = £30,415

    Is the alternative a valid method and, if so, how do you ensure HMRC use this method?
    AIUI, it's not valid, because the only allowance or band you are allowed to apply in the most beneficial way is the personal allowance - of just £1,500, in your case.

    you can't choose to use the basic rate against dividends, instead of against employment and savings income.

    and you can't choose to use the £5,000 dividend allowance against dividends that would otherwise be taxed at the higher rate - it must be used against the lowest £5,000 of dividends (other than any dividends against which the personal allowance is used).

    if you mostly follow the HMRC/Andica approach, except that you choose to set £1,500 personal allowance against savings interest instead of employment income, it would make no difference in total tax due. and if you instead set the £1,500 against dividends, you'd have more tax due. so there's no advantage in making those (permitted) choices.

    however, this is all on the assumption that the apparent £5,500 widening of the BR band is correct. if it isn't correct, then the default method is as dazed&confused gave it:

    £15,500 x 20% = £3100 (employment)
    £500 x 0% = £0 (personal savings allowance)
    £11500 x 20% = £2300 (balance of savings income)
    £5000 x 0% = £0 (dividend allowance)

    That has now used up all of your basic rate band (PSA and dividends allowance use this a up if within the standard basic rate band) and the remaining dividends are all then taxable at the dividend higher rate
    £85,000 x 32.5% = £27,625

    Total due is 3100 + 0 + 2300 + 0 + 27625 = £33025
    Originally posted by Dazed and confused
    but in this case, it would be more beneficial (and permitted) to use the £1,500 personal allowance against dividend income instead, giving you:

    £17,000 x 20% = £3400 (employment)
    £500 x 0% = £0 (personal savings allowance)
    £11500 x 20% = £2300 (balance of savings income)
    £5000 x 0% = £0 (dividend allowance)

    the basic rate band (since we're assuming it's only £32,000) was used up part way through the dividend allowance, so the remaining dividends are all then taxable at the dividend higher rate
    £83,500 x 32.5% = £27,137.50

    Total due is 3400 + 0 + 2300 + 0 + 27137.50 = £32,837.50
    which is slightly less than the default method.

    this is an example of (what i believe is) 1 of the 2 circumstances in which the personal allowance should (on certain conditions) be used against dividends in preference to other kinds of income: namely, when the dividend allowance is sliding past the basic/higher-rate boundary. because in this situation, you can save 32.5% tax on some dividends, in exchange for paying only 20% on some other income.

    the reason this doesn't apply in the HMRC/Andica calculation is that, after they have apparently widened your BR band, the dividend allowance is clearly below the basic/higher-rate boundary.
    • Richard 1963
    • By Richard 1963 20th Apr 17, 9:34 AM
    • 7 Posts
    • 2 Thanks
    Richard 1963
    Use of Tax Allowances
    Great analysis thanks. I hadn't appreciated that it is only the personal allowance that can be optimised.

    Overall the tax system needs simplification. But as Yes Minister said "that's a brave decision Minister" so is unlikely to happen.
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