Basic Rate Tax Payer and Share Dividends?

frothy-coffee_2

Hi,
I correct in thinking that there is no tax to be paid on Share dividends by a basic rate tax payer. Only CGT?

Apart from CGT there's no real advantage of having equities in a ISA, as long as you remain a basic rate tax payer.

nzseries1

Basic rate tax payers still have to pay Dividend Tax, but as long as the dividends are less than £37,400, there's no tax to pay as it's covered by the dividend tax credit.

http://www.hmrc.gov.uk/taxon/uk.htm

frothy-coffee_2

Hi,
Thanks. I don't quite understand the tax credit?

HMRC deduct 10% then credit 10% ?

nzseries1

frothy-coffee wrote: »

Thanks. I don't quite understand the tax credit?

You know what, I don't really understand it either. I was just told by my accountant friend that as long as you are a taxpayer, and you don't go over the higher tax rate threshold, then you can consider it tax-free.

Someone here may be able to explain it, but because it's HMRC, it's possible that it's beyond explanation

debbie42

My understanding of it, last time I tried to understand the jargon is that the 10% dividend tax is taken off of all payments at source before you receive them. You can't get this back, but don't have to pay any more unless you are a higher rate tax payer. Quite why they wrap it all up in fancy lingo, I don't know.

debbie42

frothy-coffee wrote: »

Apart from CGT there's no real advantage of having equities in a ISA, as long as you remain a basic rate tax payer.

There is another reason,: you don't have to fill in any paperwork for the ISA holdings on a tax return. This is a big plus for me, regardless of tax implications.

cheerfulcat

An excellent explanation here. Extract of the relevant portion -

Ordinary dividend outside a tax shelter: No tax actually paid at the time the dividend is paid. A notional tax credit equal to 1/9th of the dividend is associated with the dividend - "notional" because it does not actually represent any cash paid over to the taxman by the company on your behalf for the dividend payment. You are taxed on the sum of the dividend and the tax credit, and the tax credit can be used to "pay" the resulting tax on the associated dividend (but not tax on any other income). Special tax rates of 10% (starting and basic rates) and 32.5% (higher rate) apply to the dividend income; if you do the maths, you'll find that dividends taxed at starting and basic rates end up having no tax to pay (it's all been "paid" by the associated tax credit) - and dividends taxed at higher rate have an amount equal to 25% of the dividend to pay. If the dividend is untaxed (due e.g. to falling within your personal allowance), the associated tax credit is wasted - it cannot be used to "pay" any tax associated with the dividend, and it cannot be claimed off the taxman or used in any other way because it is a notional tax credit.

Ordinary dividend inside a tax shelter: No tax actually paid at the time the dividend is paid. I think there is in principle a notional tax credit associated with the dividend, as above, but as all dividend income inside a tax shelter is untaxed, it's completely useless and might as well not exist.

debbie42

cheerfulcat wrote: »

An excellent explanation here. Extract of the relevant portion -

Just goes to show how convoluted the process is if that's considered an excellent explanation. My eyes glazed over less than half way through!:p

frothy-coffee_2

debbie42 wrote: »

Just goes to show how convoluted the process is if that's considered an excellent explanation. My eyes glazed over less than half way through!:p

Mine did too. But I didn't like to say

cheerfulcat

Hi, debbie,

Yes, it's horrendously ( and needlessly IMO ) complicated but the end result is fairly simple. Outside of a tax shelter, divi + associated tax credit is added to other gross income. Anyone close to a higher rate tax band may find themselves pushed into the higher band by the grossed-up dividend.

Inside a tax shelter, the tax credit is wasted but the divi is ignored for income tax purposes. And of course your point about the paperwork is spot on.

Hughesy84

Basically the way Iv been told is that - any divident is taxed before you recieve it....so dont think about the tax - what you get is yours.