Dividend tax question

crux

This year I'm being paid a dividend that will take my gross earnings above the basic rate tax limit. PAYE earnings are below basic rate and will be taxed as such and then the dividend will then be accounted for on my tax return.

So numpty question,

Do I pay the 22.5% dividend tax (after tax credit) only on the portion of the dividend that goes above the basic rate tax limit? Or is it the higher rate on the whole dividend?

Just want to make sure because if the whole dividend would be taxed at the higher level, I will consider using salary sacrifice to keep me below basic rate limit.

grey_gym_sock

only on the portion that goes above the basic rate limit.

e.g. if you have £1k of unused basic rate band before the dividend, and the dividend is £2k (including 10% tax credit), then you have £225 more to pay.

Daniel_Elkington

Wouldn't it be more, if the dividend is £2k then that comes with a credit for the 10% already paid.

Dividends should be paid net with a credit that basically tells HMRC that the basic rate of tax has already been paid.

Therefore the gross dividend in that case would be 2000/0.9 = £2222.22

If he had £1K of basic rate remaining then there would be £1222.22 on which Higher Rate Tax has to be paid, which would be an additional £275. (1222.22 x 0.225)

CLAPTON

Daniel_Elkington wrote: »

Wouldn't it be more, if the dividend is £2k then that comes with a credit for the 10% already paid.

Dividends should be paid net with a credit that basically tells HMRC that the basic rate of tax has already been paid.

Therefore the gross dividend in that case would be 2000/0.9 = £2222.22

If he had £1K of basic rate remaining then there would be £1222.22 on which Higher Rate Tax has to be paid, which would be an additional £275. (1222.22 x 0.225)

whilst mathematically true, the grey gym sock's answer said

and the dividend is £2k (including 10% tax credit),

Daniel_Elkington

To someone who doesn't know the income tax rules the words including tax credit is not very helpful.

Indeed, does that mean credit paid or credit unpaid. Many people I know mean that they have got the credit certificate when they say 'including credit'.

This is why we use the terms 'gross dividend' and 'net dividend' as they have more explicit meanings and are in line with the lexicon employed by HMRC.

CLAPTON

Daniel_Elkington wrote: »

To someone who doesn't know the income tax rules the words including tax credit is not very helpful.

Indeed, does that mean credit paid or credit unpaid. Many people I know mean that they have got the credit certificate when they say 'including credit'.

This is why we use the terms 'gross dividend' and 'net dividend' as they have more explicit meanings and are in line with the lexicon employed by HMRC.

but if you didn't know the tax rules why would you understand 'gross' and 'net' as opposed to 'including credit'

anyway, it's all been adequately explained now.

ceeforcat

CLAPTON wrote: »

but if you didn't know the tax rules why would you understand 'gross' and 'net' as opposed to 'including credit'

anyway, it's all been adequately explained now.

Well you may be happy Clapton but I must completely disagree with Daniel Elkington. There is no such thing as a 'gross dividend' - there is a dividend and an associated tax credit, both of which are added together when determining tax rates. As ex HMRC I can remember this being drummed into us and must completely take issue with :

'This is why we use the terms 'gross dividend' and 'net dividend' as they have more explicit meanings and are in line with the lexicon employed by HMRC.'

There is no mention of the word 'gross' in the following HMRC guide.

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

CTA_2

ceeforcat wrote: »

Well you may be happy Clapton but I must completely disagree with Daniel Elkington. There is no such thing as a 'gross dividend' - there is a dividend and an associated tax credit, both of which are added together when determining tax rates. As ex HMRC I can remember this being drummed into us and must completely take issue with :

'This is why we use the terms 'gross dividend' and 'net dividend' as they have more explicit meanings and are in line with the lexicon employed by HMRC.'

There is no mention of the word 'gross' in the following HMRC guide.

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

I wouldn't put any reliance on HMRC guides. The terms gross dividend and net dividend are how they are referred to in tax practice i can assure you.

ceeforcat

CTA wrote: »

I wouldn't put any reliance on HMRC guides. The terms gross dividend and net dividend are how they are referred to in tax practice i can assure you.

No reliance at all? Interesting! I wonder how all the many other ex Revenue (HMRC) and fully qualified tax professionals who frequent this forum think about that!

Daniel_Elkington

Maybe I was wrong about the lexicon then, most people I speak to at HMRC tend to use this as this is what most people use.

There is no such thing as a gross dividend, agreed, however for calculating the actual tax due (as in the worked example above) it is necessary to 'gross up' the dividend.

Don't you need to 'gross up' everything in order to perform an adequate calculation?

Mary_Hartnell

I've never really understood the tax treatment of dividends, what with tax credits and the concept that the tax credit of 10% is deemed to satisfy the basic rate liability (currently 20%). It has not up to now been an issue for me but it is looking like this year my dividends will be taking me into higher level tax (40%).

Can someone talk me through the basic calculations on say the following ?

Board of directors: "Let us pay the shareholders a 10p divi this year".
HMRC: "The company will be paying 24% tax on the profit it has made on behalf of its owners and there has been a fuss about "double taxation" so let us fob them off with a dividend statement that appears to show that the company has already paid the tax on their behalf and it is only 10%.
Gordon Brown: We need more money, we cannot have the very poor, charities and pension funds claiming back that 10% (but I had better not surcharge basic rate tax payers so I will tell the standard rate tax payers that as their company will be paying 24% on their profits, we will tell them there is no more tax to pay).
Me: I get a dividend of 20,000 * £0.10 = £2,000 [I should be so lucky]:

Now changes in the tax system thrusts my marginal tax rate into the 40% band, and the way the system works, it is that pesky dividend that is on the top of the pile to be charged at the 40% rate?

So the calculation becomes 2000 add back the 10% to get 2222.22 that is the notional gross dividend.
Now 40% of 2222.22 is 888.89 and a notional 222.22 has already been paid so send HMRC an extra payment of 666.66 ?!?

Well no that does not seem to make sense and seems like extortion.
So dream up some strange rate for 40% tax payers of 32.5%.
Now 2222.22 * 0.325 = 722.22 but 222.22 has notionally been paid so the payment should be £500 - that is a nice round number and happens to be 25% of the net dividend paid.

Shame that the change in tax rate starting values has put a whole new cohort of tax payers straddling the 40% additional tax rate figure.

So to pay out the £2000 the company had to make profits of 2000/0.76 = 2631.58 and the owner if a 40% tax payer then pays an extra 25% of the actual dividend = £500

I'm not sure why they bother with the 10% tax credit at all - is it just there to disguise the fact that the government is still taking 43% of the profit as tax,
even after the cuts in corporation tax in recent budgets?
or have I got completely the wrong end of the stick ?

Will there be a whole lot more attempts to claim ESC A19 in two years time?