Where to start ? Stocks and Shares ISA

epicurate

Your second possible answer is the correct one. Gross and net are being used in a novel way. The "gross" amount of the dividend is entirely notional, not a real number. Extremely confusing, I agree, but just a weird way that tax on dividends works. It means that even though the dividend tax rate for basic rate and higher rate taxpayers is technically 10% and 32.5% respectively, the EFFECTIVE tax rate (i.e. the % which goes to HMRC of the amount paid by the company) is 0% and 25%. Weird, confusing, opaque. Just some of the adjectives that one can properly ascribe to our tax system.

bowlhead99

reeac wrote: »

Somehow the gross figure shrank by 10% to a net figure so I assume that that 10% went somewhere. Either that or else the words Gross and Net are being used in a novel way.

As epicurate says, they are indeed using gross and net in a novel way.

Say a company makes 250k of basic profits and pays 50k of interest to its bondholders and is left with 200k. It might then pay 20k corporation tax (depending on what allowances it has that year) and be left with 180k in the bank. It may then, completely optionally and at its discretion, decide to pay half the final profits out to its shareholders.

So it declares 90k dividends by announcing 9 pence per share to all of its 1 million shareholders. It sends out the cheques for ninepence each to all the shareholders, some of whom are investing through an ISA or pension, some of whom are going direct. Everyone gets 9p x their number of shares, The money that leaves, the 90,000 of cheques written, reduces the company's reserves (its "retained earnings" in the financial statements) by 90,000.

Now, HMRC will look at the 90k dividends being paid and, due to a tradition which made more sense at some point in the past, will assign each UK individual receiving the shares a notional 'dividend tax credit' of 1/9th of the 9p that they company has paid and they received. This 1p is not a credit that can ever be claimed from HMRC by any type of investor if they weren't a taxpayer, because no tax has ever actually been paid by the investor. It is only a notional credit. But a dividend reported gross of this credit on a payment voucher or your annual HL statements will say 'gross: 10p; net: 9p', as you have noticed.

However, by saying your net dividend is 9p they do not mean you have literally paid 1p or that 1p was taken off you somewhere. The net amount is simply the 'without grossing up' figure and it equates to what the company paid you and all your fellow investors. The company was never going to pay any more or any less than 90k to its owners that year. It only had 180k in the bank and this year only wanted to pay out half of it. But the grossed up amount is 10p and HMRC will run their maths off that grossed up amount when working out what, if anything, you as a investor should pay extra.

If you are a private individual investor in the low tax bracket, your tax rate on dividends is 10%. They charge you 10% of the grossed-up 10p, meaning 1p tax charge, but tell you not to worry about it as it is covered by your 'credit' on the tax statement you got from HL. Me, as a higher rate taxpayer would pay 32.5% of the 10p, being 3.25p, and only 1p of it is covered by the 'credit' so I have to pay 2.25p further to the taxman. So a basic rate payer gets to keep the full 9p declared by the company and the higher rate payer pays 2.25 (a quarter of the 9p) as extra tax.

Someone investing through an ISA or pension, or just someone who doesn't pay tax anyway because they have lots of annual allowance, will pay 0% on their 'grossed up' 10p dividend. But they cannot get their hands on the 1p 'tax credit' because it is only notional and according to HMRC it is a 'non payable tax credit'. It helps if you have tax to pay but it doesn't give you anything if you don't have tax to pay.

So, if you had an ISA or pension you would receive the 9p that the company sent, have nothing further to pay (because your rate is zero percent), and nothing you could claim back.

If you did not have an ISA/pension but were only basic rate, you would receive the 9p that the company sent, and have nothing further to pay, because you have a tax credit covering your obligation.

If you did not have an ISA/pension but were higher rate, you would receive the 9p that the company sent, and have a total 2.25p more to pay (which HMRC got from charging you 32.5% of the grossed-up 10p and then subtracting 1p of credit...)

So it is not exactly straightforward to explain, but basically you don't need to "avoid being taxed at 10% on the dividends" because you receive as much as the company paying you the dividends, actually sent you. Any perceived 10% charge is only on a notional number that HMRC themselves created by adding "how much they are going to allow a basic payer to be let off the tax" onto the actual cash that you phyiscally received and get to keep. You do not suffer from this 10% charge - it's an entirely notional construct and the only tax paid in the system, is the 20k tax that the company paid over to HMRC itself as corporation tax.

The treatment is different for the holders of bonds (loans) in the same company, or for holders of funds that invest in those bonds. If the company pays 5p interest on each one of its million bonds, total 50k, it withholds 20% from you at source. So you get 4p and you might need to pay a bit more tax if you are a high rate taxpayer, via a tax return. Nobody is allowed a special notional credit in this situation, because by the company paying out 50k of bond interest it knocked down its profits and therefore its corporation tax, so if you received the interest HMRC will want to make damn sure you pay income tax on it at your marginal rate.

Of course, if you are a nil tax payer (because you have spare annual allowance, or because you're investing inside a pension wrapper, or you're in an ISA), then you don't need to pay any tax on the bond interest even though the withholding was performed on you and your fellow investors. You can claim back the amount that was withheld. If you are outside a wrapper you can claim it back through a tax return; if you are inside a pension or ISA wrapper your investment firm will claim it back for you. Claiming the withheld tax back in this situation is fine and allowable because tax really was literally withheld from you and it's not just some notional credit.

Simple_Si_2

Any opinions about a stocks and shares isa with legal and general investing in their tracker funds?

Archi_Bald

L&G don't figure amongst the cheapest ISA platform providers: http://monevator.com/compare-uk-cheapest-online-brokers/ and appear to only offer a very limited range of investments.

jimjames

Archi_Bald wrote: »

L&G don't figure amongst the cheapest ISA platform providers: http://monevator.com/compare-uk-cheapest-online-brokers/ and appear to only offer a very limited range of investments.

Just had a quick look at the L&G website to see how they compare as they may have been cheaper than the likes of HL if they didn't apply a platform charge.

Looks like their UK tracker is over 0.8% AMC which is very high even compared to a platform fee + tracker AMC

Simple_Si_2

Charles Stanley Direct or r-plan, any recommendations?

Simple_Si_2

Vanguard FTSE Dvp Wld Ex UK Equity Index Fund Acc looking to invest in the above fund. any suggestions?

Simple_Si_2

I take it that its not possible to open/register an account with Charles Stanley Direct whilst I'm outside the uk?

jimjames

Simple_Si wrote: »

I take it that its not possible to open/register an account with Charles Stanley Direct whilst I'm outside the uk?

Nothing to stop you opening an account from anywhere in the world as most platforms have online applications. If you are saying you are not UK resident then that is different

Archi_Bald

You are not allowed to contribute to an ISA if you are not a UK resident for tax purposes. http://www.hmrc.gov.uk/isa/faqs.htm#14