S & S ISA and new £5000 dividend allowance

masonic

Laughing_Boy wrote: »

It seems odd that the government's own information states "dividends are taxed at 10%".

The money advice service was set up by the Government, but it is an independent body, which is just as fallible as the myriad of other organisations with similar aims. The Government's own websites end .gov.uk and the place you should go for official information about tax is https://www.gov.uk/government/organisations/hm-revenue-customs

It is noteworthy that right beside the statement you quoted, there is a warning box stating "Golden Rule - If you don’t understand a financial product, get independent financial advice before you buy." Perhaps that rule should also apply to publishing an article about a financial product.

Perhaps they are referring to corporation tax.

There is no 10% rate of corporation tax. The error that they (and you) are making is treating a 10% tax credit as a 10% tax deduction. Of course, you can only cash in the 10% credit against actual tax you pay on the dividends - if you are a basic rate or non-taxpayer, you pay no tax on them so the credit cannot be utilised.

colsten

C_Mababejive wrote: »

Also correct me if im wrong but isnt divis classed as income and therefore any excess over 5k could move you into a higher tax bracket?

It could indeed, for some of your income. That's another reason why you'd preferably want to hold all your investments in an ISA.

That recommendation that S&S ISAs "provide no benefit to a basic rate tax payer" must have been written by someone very short-sighted and thoroughly inexperienced with investments.

Laughing_Boy

masonic wrote: »

There is no 10% rate of corporation tax. The error that they (and you) are making is treating a 10% tax credit as a 10% tax deduction.

Evidently a 10% tax credit is not the same as a 10% tax deduction. I was assuming however that the 10% credit is there to offset tax already paid - otherwise HMRC is being very generous by not charging basic-rate tax on dividends (regardless of whether the shares are in an ISA or not)

The following is from http://www.informdirect.co.uk/shares/dividend-tax-and-basic-rate-taxpayers/

"Companies pay dividends out of profits on which corporation tax has already been paid (or will be paid). To avoid double taxation, a dividend tax credit is available to the shareholder. This is offset against income tax that would otherwise be due on the dividend income they’ve received."

masonic

Laughing_Boy wrote: »

Evidently a 10% tax credit is not the same as a 10% tax deduction. I was assuming however that the 10% credit is there to offset tax already paid - otherwise HMRC is being very generous by not charging basic-rate tax on dividends (regardless of whether the shares are in an ISA or not)

You are correct that the "10% credit is there to offset tax already paid", but the tax in question is the corporation tax paid by the company making the distribution from its profits, which are notionally treated as having been taxed at 30% (although the actual rate has been falling for several years and now stands at 20-21%). At this point you have not paid any tax on the dividend you receive. Importantly, at no point has 10% tax been taken from anyone, nor has "basic-rate tax" been taken from anyone. Also, another important principle is that you cannot reclaim somebody else's tax.

To avoid double taxation, the notional 30% corporation tax paid by the company completely cancels out the normal basic rate of income tax (20%), so HMRC does not charge any income tax on dividends for basic rate taxpayers. Furthermore, after cancelling out the basic rate, a further 10% corporation tax is left as a remainder, so a 10% tax credit is issued that can be used against any further tax liability.

I hope that clears things up.

The following is from http://www.informdirect.co.uk/shares/dividend-tax-and-basic-rate-taxpayers/

"Companies pay dividends out of profits on which corporation tax has already been paid (or will be paid). To avoid double taxation, a dividend tax credit is available to the shareholder. This is offset against income tax that would otherwise be due on the dividend income they’ve received."

Which is a correct explanation - proving that not every website you find via a Google search has incorrect information on it , but you'd still be well advised to stick to official sources, because there is clearly a mixture of correct and incorrect information out there.

C_Mababejive

Archi_Bald wrote: »

Did you actually read the Bowlhead lecture?

Could someone direct me to Mr Bowlheads Epistle on the subject please?

colsten

How about the links in post 8 and post 2?

C_Mababejive

colsten wrote: »

How about the links in post 8 and post 2?

Perfect..my eyes arent what they used to be..

So having read the Bowlhead Epistle,,can i finally lay one final query to rest,,

If in the tax year 2016/17 i earn eaxtly £43,000 gross in my employment i understand that i can alaos have 5k divis tax free and 1k savings allowance tax free.

What would happen if i earned 10k divis and 2k savings interest?(if there is any extra tax to pay what rates would apply?)

If i earned 40k via my employment and received 10 k divis and 2k savings interest, what would the situation be?

tnx

masonic

C_Mababejive wrote: »

Perfect..my eyes arent what they used to be..

So having read the Bowlhead Epistle,,can i finally lay one final query to rest,,

If in the tax year 2016/17 i earn eaxtly £43,000 gross in my employment i understand that i can alaos have 5k divis tax free and 1k savings allowance tax free.

What would happen if i earned 10k divis and 2k savings interest?(if there is any extra tax to pay what rates would apply?)

If i earned 40k via my employment and received 10 k divis and 2k savings interest, what would the situation be?

tnx

There's some very clear information and worked examples at https://www.gov.uk/government/publications/dividend-allowance-factsheet/dividend-allowance-factsheet.

In your first example, £10k in dividends would push you into the higher rate. You'd lose £500 of your personal savings allowance and pay higher rate tax on the excess savings interest and £5k of the dividends.

In your second example, the dividends would still push you into the higher rate, but £1.5k of savings interest would attract basic rate tax and £5k of dividends would be taxed at the higher rate.

C_Mababejive

Another question...In a stocks and shares ISA (self select-not funds),how are the dividends treated? for example, if i get a £500 dividend payment, can it be paid out as cash and would that be taxable, or can you re-invest it and that wouldnt attract any tax? tnx

jimjames

Anything inside an ISA is tax free.