Explain tax on divis to me please

C_Mababejive

masonic wrote: »

You could leave the shares where they are and just pay the excess income into a SIPP in order to avoid paying any higher rate tax. Getting what you can into an ISA would be beneficial for CGT reasons.

But how would that work?? If for example the shares are held in a nominee account and/or in paper,,the divi income would be simply added to the nominee account twice a year ,fed into a drip or paid out into a bank acc if paper certs are held?

Come to think of it, if shares are held in a nominee account are the nominee providers going to have to supply data on beneficial owners since strictly speaking, the nominees own the shares??

Linton

Man_on_fire wrote: »

The government is conducting a tax rise, people who are basic rate tax payers who earn over £5000 in dividends outside of ISAs will now pay tax. Which is a form of double taxation, as the company should have already paid tax on their profits anyways.

Dividends may bear little relationship to the company tax paid. Astrazeneca for example manages to pay a good dividend without paying UK corporation tax. See here. Also dividends are used for NI avoidance by single-person companies, which perhaps is the main reason for the change

Even under the new system the dividend tax is significantly lower than income tax for basic rate tax payers so I dont see much reason to complain.

C_Mababejive

Linton wrote: »

Dividends may bear little relationship to the company tax paid. Astrazeneca for example manages to pay a good dividend without paying UK corporation tax. See here. Also dividends are used for NI avoidance by single-person companies, which perhaps is the main reason for the change

Even under the new system the dividend tax is significantly lower than income tax for basic rate tax payers so I dont see much reason to complain.

But it seems to me that it is an extra tax that i didnt pay before but now i have to pay??

masonic

C_Mababejive wrote: »

But how would that work?? If for example the shares are held in a nominee account and/or in paper,,the divi income would be simply added to the nominee account twice a year ,fed into a drip or paid out into a bank acc if paper certs are held?

You would take that money and pay it into a SIPP, or pay in an equivalent sum of cash you can readily access. Higher rate tax relief will cancel out any higher rate tax liability. Even better, if you have a workplace pension operating by salary sacrifice increase your contributions there to offset the dividend income and avoid any higher rate tax liability to begin with - this will avoid you losing £500 of the personal savings allowance.

Edit: Coming back to the scenario in your OP:

If i were a basic rate taxpayer just below the basic rate threshold and for example i was lucky enough to receive divis of say £15k pa,,what would the position be after April 2016??

Would i still be a basic rate taxpayer who also had to pay 15k-5k=10k at 7.5% or would the fact that i receive 10k divis above the 5k allowance, drag me into a higher tax bracket and mean id have to pay more tax?

In this situation, if you are just below the higher rate threshold without the dividends (which I assume is what you mean), and then you add the dividends on top, then this will take you into the higher rate tax band and currently you'd have a 25% tax liability on those dividends that fall above the threshold. Under the new system, £5k of those dividends will be paid tax free (which could be better or worse than the current situation depending on how close to the higher rate tax threshold you are) and then above that you'll pay 7.5% more than you previously did in tax.

Come to think of it, if shares are held in a nominee account are the nominee providers going to have to supply data on beneficial owners since strictly speaking, the nominees own the shares??

It's the beneficial owner who owns the shares.

C_Mababejive

#15

Thanks,,and that brings me onto another area which is connected and which you touched on !

In the tax year 2015-16 the personal allowance is £10600

The basic rate of tax (20%) is £31,785

So if ,for eg,my sole source of income is via PAYE then my total gross income or the year could be £42,385 and i would have no further income tax liability.

If in my example (tax yr 2015/16) i did indeed earn upto £42,385 gross and i also had divi income of say £4000 in that year is it the case that that divi income is subject to higher rate taxation..?

Err,,and moving on....

In the forthcoming tax year 2016/17

Personal allowance will be £10,800
Basic rate tax band upper limit £31,900
So total earnings if PAYE only=£42,700

So taking my notional £4000 share income in 2016/17 id pay 7.5% tax on my 4k (and upto 5k) whereas in 2015/16 i would have paid 40% on my 4k upto to higher rate upper limit.

I wonder if there are lots of people who have earned upto the upper limit of the basic rate threshold and have had divi income on top of that and didnt even realise they had to declare it..??? err..and further,will not realise that they have to decalre divi income under the new 5K rules..?

I suspect a lot of people on PAYE arent used to the whole tax return thing and just think,,well ive paid my income tax and thats it..

masonic

C_Mababejive wrote: »

So if ,for eg,my sole source of income is via PAYE then my total gross income or the year could be £42,385 and i would have no further income tax liability.

If in my example (tax yr 2015/16) i did indeed earn upto £42,385 gross and i also had divi income of say £4000 in that year is it the case that that divi income is subject to higher rate taxation..?

Yes, you'd have to declare the £4000 dividend income and pay 25% tax on it (£1000).

So taking my notional £4000 share income in 2016/17 id pay 7.5% tax on my 4k (and upto 5k) whereas in 2015/16 i would have paid 40% on my 4k upto to higher rate upper limit.

No, in this case your £4000 would be covered by the £5000 dividend allowance so your tax liability would be zero. The change would leave you £1000 better off.

If you received anything over £5000, you'd pay 32.5% tax on the excess.