Dividend Income when exceeded £100k income limit for personal allowance

JamTomorrow

For 2016/17 it looks like I will exceed the £100k limit for personal allowance by £3k and therefore have a marginal rate of tax of 60% on the £3k. I plan on managing this by paying extra into my pension.

In addition to this income I also forecast that I will receive ~£1k of dividend income during tax year 16/17 putting my total taxable income at £104k.

I now have an opportunity to waive some of my bonus into my pension and I’m trying to work out how much that should be and the introduction of a £5k dividend allowance is confusing me on this.

Should the dividend income be considered when determining how much to waive into pension to avoid the 60% rate – ie a waiver of £4k. Or, as the dividend income is below the $5k limit would it be excluded from my calculations and therefore I only need to waive £3k?

How would it work if my dividend income increased to a level above the £5k dividend allowance, say at £10k?

kidmugsy

It may be that clarification will be forthcoming in the bumf published with the Budget, but my present understanding is that you'd want to put enough into a pension to get your whole income, dividends included, below £100k. That's because "Dividend Allowance" isn't an allowance you simply subtract from the total, the way most of us do with Personal Allowance. It's really a zero-% band that can force your total income up into a higher tax bracket even though you pay 0% tax on the first £5k p.a. itself.

Spidernick

I agree with post #2 and had this confirmed in a recent tax update. The same is true of the Child Benefit claw back. If you have a salary of £50K and dividend income of £1K you'd suffer a 10% claw back of child benefit (with total income of £51K), even though the dividend income wouldn't directly be taxable.

Dazed_and_confused

Spidernick wrote: »

I agree with post #2 and had this confirmed in a recent tax update. The same is true of the Child Benefit claw back. If you have a salary of £50K and dividend income of £1K you'd suffer a 10% claw back of child benefit (with total income of £51K), even though the dividend income wouldn't directly be taxable.

The confusing thing about this so called allowance is that the dividends are actually still taxable, it's just that the tax rate for the first £5000 is 0%

Same thing I think with the new Personal Savings Allowance for interest, the first £1000/£500 is still taxable but the tax rate is 0%.

kidmugsy

If one has a spouse handy, one could transfer the shares to her/him if that helped avoid the 40%/60% tax bands.

JamTomorrow

Thanks for clarification. I'll elect to waive £4k from my bonus.

JamTomorrow

kidmugsy wrote: »

If one has a spouse handy, one could transfer the shares to her/him if that helped avoid the 40%/60% tax bands.

Unfortunately the dividends are payable on shares held under Share Incentive Plan schemes which I cant transfer out yet (without causing them to be subject to income tax and NI).

polymaff

kidmugsy wrote: »

... That's because "Dividend Allowance" isn't an allowance you simply subtract from the total, the way most of us do with Personal Allowance. It's really a zero-% band that can force your total income up into a higher tax bracket even though you pay 0% tax on the first £5k p.a. itself.

Absolutely right. A very important calculation in 2016/17 will be your

https://www.gov.uk/guidance/adjusted-net-income

Understand and correctly compute this before you do anything else. Then the significance and effect of 0% allowances should be easier to understand.