Dividend tax question

Tardigrade

Newbie question so apologies if it's considered a basic question.

My question concerns dividends and the rate at which they are taxed.

Assume I'm a basic rate taxpayer, then if I understand things correctly no tax is due on dividend payments from my shares in Standard Life due to the tax credit.

The bit I'm not sure of is when you are a basic rate taxpayer and you are close to the 40% higher rate tax threshold. Does the dividend payment get added to your income and effectively make you a higher rate taxpayer ?

For instance say you earned £37k from your job and also received £5k in dividends from shares owned. Does this make the individual a higher rate taxpayer and thus incur additional tax on the dividend. My question arises from the fact that the income is now £42k a year as the dividend has been added to the earned income.

I find this bit hard to understand. It's simple enough if you are a higher rate taxpayer to begin with, but where is the cross over from basic to higher rate if dividends are involved ? What if the dividends are greater than the earned income ? Say £10k earned and £35k in dividends ?

Sorry, if I haven't explained this clearly.

Thanks in advance for any assistance.

Jon

John_Pierpoint

Tax man tries to explain here:
http://www.hmrc.gov.uk/taxon/uk.htm

These days your dividend income will be treated as the top slices of your income.:(

CLAPTON

Tardigrade wrote: »

Newbie question so apologies if it's considered a basic question.

My question concerns dividends and the rate at which they are taxed.

Assume I'm a basic rate taxpayer, then if I understand things correctly no tax is due on dividend payments from my shares in Standard Life due to the tax credit.

The bit I'm not sure of is when you are a basic rate taxpayer and you are close to the 40% higher rate tax threshold. Does the dividend payment get added to your income and effectively make you a higher rate taxpayer ?

For instance say you earned £37k from your job and also received £5k in dividends from shares owned. Does this make the individual a higher rate taxpayer and thus incur additional tax on the dividend. My question arises from the fact that the income is now £42k a year as the dividend has been added to the earned income.

I find this bit hard to understand. It's simple enough if you are a higher rate taxpayer to begin with, but where is the cross over from basic to higher rate if dividends are involved ? What if the dividends are greater than the earned income ? Say £10k earned and £35k in dividends ?

Sorry, if I haven't explained this clearly.

Thanks in advance for any assistance.

Jon

john states the position very well

but do bear in mind that 40% tax starts at income of 7475+35000 i.e. 42,475
if you pay any pension then that is tax free, so if you pay say 2,000 in pension your income can be 44,475 before 40% tax is payable

Pennywise

Also remember it's not the amount received that gets added to other income, it's the amount of dividend plus its tax credit, i.e. the gross dividend not the net. A lot of people miss this!

tyllwyd

... hmm, so if your dividend income added to your income takes you into the higher rate tax bracket, that's not so bad in itself, but (when the rules change in 2013) if you have children does that mean you are now a higher rate taxpayer and not eligible for child benefit? Could be a nasty surprise!

Pennywise

tyllwyd wrote: »

... hmm, so if your dividend income added to your income takes you into the higher rate tax bracket, that's not so bad in itself, but (when the rules change in 2013) if you have children does that mean you are now a higher rate taxpayer and not eligible for child benefit? Could be a nasty surprise!

Yep, that's it exactly.

John_Pierpoint

So if you are a couple it makes sense for both of the two of you to be just under the 40% band. and avoid paying too much tax.

Time to spouse and ISA those shares?

CGT limits for the latter manoeuvre here:

http://www.hmrc.gov.uk/rates/cgt.htm

tyllwyd

So if you didn't realise, and you happily paid basic rate tax and claimed child benefit all year ... then dividends/bonus were paid in March and took you into the 40% tax band - would you then have to repay the child benefit for that tax year? And when you started the new tax year in April on your normal salary, would you become eligible for child benefit again? I wonder if the powers-that-be have thought through all of this ?

Pennywise

Family allowance continue to be paid in the same way to the same person throughout regardless.

The amount received in family allowance, is however, taken back again in the tax code of the higher rate parent, i.e. more tax deducted from their wages.

So if mother has always received it into her bank account, that will continue. However, father, once he becomes a h/r taxpayer, will find the same amount deducted from his pay packet (or via his self assessment tax return).

Fun times ahead!!

John_Pierpoint

More wife beating then Stella ?:eek:







Artois

http://en.wikipedia.org/wiki/Stella_Artois

tyllwyd

Pennywise wrote: »

Family allowance continue to be paid in the same way to the same person throughout regardless.

The amount received in family allowance, is however, taken back again in the tax code of the higher rate parent, i.e. more tax deducted from their wages.

So if mother has always received it into her bank account, that will continue. However, father, once he becomes a h/r taxpayer, will find the same amount deducted from his pay packet (or via his self assessment tax return).

Fun times ahead!!

But child benefit is paid 4-weekly, so if you only become a higher rate taxpayer at the end of the tax year, you will have received child benefit for the whole of that year - but someone with exactly the same total taxable income as their basic salary wouldn't have received it. Will it be clawed back? I can imagine that filling in your self-assessment and finding that they want tax equivalent to a year's child benefit is going to be a bit of a shock. And if it has been paid to one person and reclaimed from another I can see that might lead to a few disagreements, especially if the relationship has broken down in the meantime ...