Tax Credit and Income Tax on Divis..

jacko74

Am I right in thinking that a slightly bizarre system is in place...

For a basic rate Income tax payer you get a 10% tax credit automatically added to your gross dividend income, you then get charged 10% Income tax on that gross?

i.e if my consolidated tax certificate shows...

gross divi income - £220
net divi income - £200
tax/tax credit - £20

In this case the the initial gross figure includes 10% tax credit, which is then taken away from it in income tax also of 10%

Have I got this right?

molerat

Basically correct, there is no further tax to pay if you are a basic rate tax payer. Basic rate tax payers pay 10% on dividends and the tax credit accounts for it.

The tax credit on a £200 net dividend would be £22.22 (1/9th). £222.22 - 10% = £200

A higher rate tax payer would be liable for 32.5% tax on the gross dividend. 222.22 * 32.5% = 72.22 - 22.22 = £50 tax to pay, they effectively pay 25% extra on the net dividend.

Pincher

If the dividend gets into a pension fund or ISA, it becomes tax exempt. So Gordon Brown made the company pay 10% tax on the dividend before paying it out.


This means your pension pot used to get £100, but only get £90 after they introduced this "tax credit". So your pension and ISA now grows slower, and he hoped you wouldn't notice until you are to old to complain.

le_loup

Pincher wrote: »

If the dividend gets into a pension fund or ISA, it becomes tax exempt. So Gordon Brown made the company pay 10% tax on the dividend before paying it out.

So, have you forgotten that this process was started with the first 10% by Normon Lamont and that Gordon Brown removed ACT and reduced Corporation Tax at the same time?
Thought so.

Linton

Pincher wrote: »

If the dividend gets into a pension fund or ISA, it becomes tax exempt. So Gordon Brown made the company pay 10% tax on the dividend before paying it out.


This means your pension pot used to get £100, but only get £90 after they introduced this "tax credit". So your pension and ISA now grows slower, and he hoped you wouldn't notice until you are to old to complain.

Not quite. Its a lot more complicated than that being all tied in with a now non existent tax called Advanced Corporation Tax which was brought in by the Heath government in 1973 - a long time before Gordon Brown who later abolished it. This taxed companies on the dividends they paid prior to the actual corporation tax was calculated after the end of their tax year. The ACT was deducted from that final tax bill. Perhaps that discouraged tax avoidance in some way.

So Gordon Brown didnt introduce an extra tax on company dividends. He removed an existing one and as a by-product removed the tax refund for a tax which was abolished. I wont bore you with more details - Google/Widipedia will help.

Linton

I agree with the OP. The current system of 10% standard rate tax and 10% tax credit is crazy. Personally I think we should go back to the old days when dividends were simply taxed as income. And then everyone would be happy with their 20% tax advantage in a pension or ISA.

Pincher

How people read the same story and see something different is also pretty crazy.




http://www.telegraph.co.uk/news/uknews/1531448/Browns-raid-on-pensions-costs-Britain-100-billion.html


"The removal of tax relief on share dividends starved funds of a key source of money."




I have no doubt somebody robbed Pete to pay Paul when working out a budget, but the bit about hurting my pension pot affects me more directly.

Linton

Pincher wrote: »

How people read the same story and see something different is also pretty crazy.




http://www.telegraph.co.uk/news/uknews/1531448/Browns-raid-on-pensions-costs-Britain-100-billion.html


"The removal of tax relief on share dividends starved funds of a key source of money."




I have no doubt somebody robbed Pete to pay Paul when working out a budget, but the bit about hurting my pension pot affects me more directly.

Sure the removal of the "tax relief" affected pension funds, but by that time it seems to me that it had become more of a subsidy than a tax relief. Though "starving seems a little OTT.

Perhaps you should look to other sources of info than the Telegraph? They do have an axe to grind.

coyrls

There is a very good clear explanation of all this here: http://www.theaic.co.uk/sites/default/files/AICTaxationofDividendsConsumerguide.pdf

le_loup

Pincher wrote: »

I have no doubt somebody robbed Pete to pay Paul when working out a budget, but the bit about hurting my pension pot affects me more directly.

No it doesn't. Your pension invests in companies that had their tax reduced and therefor increased their profit which made them more valuable. The effect of the changes were tax neutral.

Pincher

le_loup wrote: »

No it doesn't. Your pension invests in companies that had their tax reduced and therefor increased their profit which made them more valuable. The effect of the changes were tax neutral.

A tax grab that costs nothing.
Nobody is short changed when they retire.
But Gordon Brown had more money to burn.
Hurray.