Am I a higher rate tax payer..?

PeteW

Hi,

You'd think I'd know, but it's a bit confusing...

My salary is £40,000 but from this year I now get an additional £5,000/year in dividends which I need to declare in a tax return. I've also started doing mystery shopping which will probably bring in less than £1,000/year but still needs declaring on a tax return.

I've never done a tax return or had any income other than PAYE so it's all a bit new to me. I'm aware that the dividends are taxed differently, at a different rate to the PAYE income, but does the total income of ~£46,000 mean I am above the £43,875, or are the dividends considered separately?

Trying to work out if my mystery shopping income will be taxed at 20% or 40%, and whether I'm eligible for 40% tax relief on my pension contributions.

Cheers

Pete

cb4fwh

Yes, you will need to pay additional tax when you submit your tax return as this will take you over the higher rate tax limit.

• The gross dividend is £5,555, making your total gross income £46,555
• You are a higher rate tax payer (limit is £34,370). Extra tax is payable on dividends
• £4,076 of your gross dividend income is subject to further tax.
• The extra tax to pay is £917 (18.3% of net dividend).

The above calculation is based on your figures being inserted into the calculator at http://www.contractorcalculator.co.uk/Dividend_Tax_Calculator.aspx

CLAPTON

higher rate tax at 40% starts with income of 42,475 made up of personal allowance of 8100 and 20% tax band of 34,370

the relevant earning for this are:

actual gross salary
plus benefits in kind (maybe car, medical etc)
plus grossed up interest on saving
plus grossed up dividend
less pension payments

so how much do you pay into a pension?

dividends already have a tax credit of 10% and then attract a further 25% tax if over the 40% band

Credit-Crunched

CLAPTON wrote: »

higher rate tax at 40% starts with income of 42,475 made up of personal allowance of 8100 and 20% tax band of 34,370

the relevant earning for this are:

actual gross salary
plus benefits in kind (maybe car, medical etc)
plus grossed up interest on saving
plus grossed up dividend
less pension payments

so how much do you pay into a pension?

dividends already have a tax credit of 10% and then attract a further 25% tax if over the 40% band

The additional liability is 22.5% not 25% (further to 10% divi credit already paid)

ceh209

The additional liability is 22.5% not 25% (further to 10% divi credit already paid)

Just to clarify (or confuse further! ), it's 25% of the dividend amount you actually received (which is net of a 10% tax credit)

e.g. dividend is 90
you receive 90
tax credit of 10 (credit = no tax actually paid), total 100
extra tax due if higher rate payer = 22.5 (25% of 90)
net cash you get = 67.5
i.e. effective 'tax' rate of 32.5%

Credit-Crunched

ceh209 wrote: »

Just to clarify (or confuse further! ), it's 25% of the dividend amount you actually received (which is net of a 10% tax credit)

e.g. dividend is 90
you receive 90
tax credit of 10 (credit = no tax actually paid), total 100
extra tax due if higher rate payer = 22.5 (25% of 90)
net cash you get = 67.5
i.e. effective 'tax' rate of 32.5%

Well done us, we have made this clear as mud!! :rotfl:

PeteW

CLAPTON wrote: »

so how much do you pay into a pension?

It's varied over the year, but currently £150/month.
I also have childcare vouchers (and previously bike payments for a cycle-to-work scheme) deducted from my salary before I'm paid, does that affect things at all as the salary I receive is less than my official 'salary'?

The dividend stuff seems confusing!

At what point is it worth seeing an accountant? Obviously I'd rather avoid the cost if possible!

Thanks for the help everyone!

gadgetmind

PeteW wrote: »

It's varied over the year, but currently £150/month.

In your position, I'd seriously consider upping that.

I also have childcare vouchers (and previously bike payments for a cycle-to-work scheme) deducted from my salary before I'm paid, does that affect things at all as the salary I receive is less than my official 'salary'?

Forget "official" salary, it's what's on your payslips and p60 that counts.

PeteW

gadgetmind wrote: »

In your position, I'd seriously consider upping that.

Oh I intend to! £450/month is my target, currently lower as we have a new boiler and new conservatory roof to save for

gadgetmind

BTW, are the assets that are generating these dividends shares that can be held in an ISA? If so, you should consider using "Bed and ISA" to hide them away from the tax man.

You also say "we" so note that you can transfer shares to a spouse without any tax implications and the dividend income will then be in her name.