Dividend Allowance Tax Impact for a Couple

Okrib

I’m struggling to work this out, and online calculators seem to be throwing up different answers so thought I’d check in to see if anyone can advise…

Situation(s) as follows:

Total dividend of £48,000 between two partners who are captive shareholders in a private company (neither is employed by the company in question). A works, and is a higher rate tax payer. B doesn’t work.

Currently, the best solution is as follows:

A - £5,000 to utilise the dividend allowance
B - £43,000, of which £11,000 (personal allowance) and £5,000 (dividend allowance) leaving £27,000 taxable at 7.5% (£2,025) and a net of £40,975

Total net of £45,975

Going forward on the same dividend:

A - £2,000
B - £46,000, of which £11,500 and £2,000 used respectively, leaving £31,500 taxable at 7.5% (£2,362.5), £1,000 taxable at 32.5% (£325) and a net of £43,312.50

Total net of £45,312.50 (-£662.5)

This doesn’t seem to tally up with reports as to how much taxpayers will lose out by, which suggests it should be £225 a year? Are my calculations wrong?

And assuming a dividend of £60,000, are these calculations correct?

Current:

A - £5,000
B - £55,000, with deductions of £16,000 leaving £39,000 taxable. £32,000 at 7.5% (£2,400) and £7,000 at 32.5% (£2,275). Net of £50,325

Total net of £55,325

Going forward:

A - £2,000
B - £58,000, deductions of £13,500 leaving £44,500 taxable. £31,500 at 7.5% (£2,362.50) and £13,000 at 32.5% (£4,160). Net of £51,477.50.

Total net of £53,477.50 (-£1,847.50). Again, this figure seems at odds with the figures quoted for the impact of this change.

Am I getting the calculations wrong, or is it incorrect to say that basic rate payers lose out by £225 / year and higher rate payers by £975 / year?

Pennywise

You're getting the figures muddled because they're not "like for like". If you do the sums with the same respective dividends to A and B for each tax year, you'll get different results in line with the published affects.

What you're doing is changing the dividend split between A and B as well which muddies the waters as you're increasing the income of B pushing them into higher rate tax.

Another thing, though, is that the £5k dividend "allowance" is a zero rate band of it's own, so it uses some basic rate band, so you don't have £5k dividend allowance and £32k basic rate band. In your second scenario, the £60k, split £55k to B, their current year tax will be £5,925 being

£11,000 tax free personal allowance
£5,000 zero tax
£27,000 7.5% basic rate (£32k less £5k zero rate dividend band)
£12,000 32.5% higher rate

So total tax is £5,925.

anselld

If the couple own the shares jointly you can't just split the dividend how you like to minimise tax. It must be split 50:50.

Or are you planning to change share ownerships?

kidmugsy

Why not (a) transfer some personal allowance from B to A to save him some HRT? (b) make some pension contributions to avoid higher rate tax?

Anyway "going forward" you should be using the future numbers: for 18/19 personal allowance will be something above £11,500 and the higher rate threshold will be above £45k. Those changes may well leave some people better off.

polymaff

Do you understand the implications of what-if-ing with the amounts paid to each shareholder?

As the others have said, you are not being consistent and misunderstand tax on dividends.

The £225 to £975 range is correct for basic and higher rate tax payers.

TheCyclingProgrammer

The impact of the dividend allowance change will probably be largely neutralised for those whose dividends are below the higher rate threshold due to the increase in the personal allowance and the higher rate band.

Having said that, I wouldn't be at all surprised to see the dividend tax rate to increase too, possibly in the Autumn budget, to compensate (especially with the corporation tax rate being reduced too).

Apodemus

TheCyclingProgrammer wrote: »

The impact of the dividend allowance change will probably be largely neutralised for those whose dividends are below the higher rate threshold due to the increase in the personal allowance and the higher rate band.

Unless you are a Scottish taxpayer!

polymaff

TheCyclingProgrammer wrote: »

The impact of the dividend allowance change will probably be largely neutralised for those whose dividends are below the higher rate threshold due to the increase in the personal allowance and the higher rate band.

Can't agree with all of that. The increase in the PA is higher than present inflation, so there's a bit to spare - at present. What inflation will be, who knows, but I suspect that there will be little of the rise in the PA spare that can then be said to mitigate other rises in taxation.

Okrib

Thanks all for your comments.

I understand it's confusing, and I'm not necessarily comparing like with like, I'm trying to understand the most efficient way to structure things between the two partners going forward.

Shares are owned individually but can be transferred freely between the married couple.

There is no option for pension contributions, all the monies are required.