Grossing up div income for age related allowance?

Judesman

The tax on my state pension is deducted from the pension paid by my previous employer. To calculate the available age related allowance (I am 65) HMRC totals my gross income and deducts half the total in excess of £24000 from an allowance of £9940 to ascertain my final allowance and tax code. To calculate the total income figure my net Building Society interest is grossed up but HMRC tells me that my dividend income is also grossed up to include the 10% tax credit. Is this correct please? I thought dividend income was treated as the amount received except for higher rate tax payers which I am not.

Any help appreciated.

Regshoe

Dividends are taxed at 10% at basic rate payers (rather than 20% for earned income), 32.5% for higher rate payers (rather than 40%) and 42.5% for additional rate payers (rather than 50%). However they all come with a 10% tax credit, so they treat it as if you've only received 90% of the total money owed.

What this means is that say you receive £9000 and are a basic rate tax payer they gross up the amount you receive to be £10,000 (£9000/0.9) then tax you on this at 10%, so £1000 tax, but you also get 10% of the £10,000 as a tax credit - so these net out. It seems a little odd to charge tax and net it off with a credit - but it does make a difference in some circumstances - such as the reduction to your age related personal allowance.

If you were a higher rate payer for the above example you would be taxed £3,250, but then have a tax credit for £1,000 and so pay tax of £2,250.

Judesman

Thank you very much Regshoe. So HMRC were correct in grossing up my dividend income to calculate the deduction from the age related allowance.