Higher rate income tax question

Oompa_Lumpa

Say I earn £41k (so am in the higher rate band) from my salary and receive deposit interest of £1000 and dividends of £350.

My understanding of the above is that I pay 40% on the salary over £38,335 and the deposit interest. How much do I pay on the dividends?

Now I contribute approx £3300 pa to a stakeholder pension. By my calculations this means that I wouldn't pay any higher rate tax on my salary or deposit interest, but may have to pay something extra on dividends - is that correct?

If so should I contribute another £1k (or whatever it takes to get my total income below the £38k mark) to my stakeholder pension so that I don't pay any higher rate tax?
My question is, providing I can afford to put another £1k into the pension, have I worked out correctly above that the marginal saving on the extra which I put into the pension scheme is pretty good and so is worth doing?

ReportInvestor

Oompa_Lumpa wrote:

How much do I pay on the dividends?

You are credited as having paid 10% already.

You have to pay an extra 22.5%.

It is your total income that is the figure you have to work with.

It is worth creating a spreadsheet for this so that you can use pension contributions to just edge under the top rate tax pand - alternatively you can buy some taxcalc type software.

Getting tax right if you are on the margins is well worth it , because of the money you save and the [Inland Revenue] hassle you avoid.

cash99

If you are a higher rate tax payer you pay 22.5% on the gross amount of the dividend = 25% of the dividend received. Otherwise the tax is covered by the 10% tax credit.

The £3300 contributions you are paying now, is that before or after basic rate tax, is it the amount you pay to the pension company? If it is, it grosses up to £4230, which is already enough to wipe out your higher rate liability.

Your final question about making an extra £1000 contribution is a personal investment decision and not a tax question. You will gain tax benefits by making the contribution, but is this what you want to do with your money.

If you are married, and you OH is below the higher rate tax threshold, then consider transferring the money and shares to them to avoid the problem.