A simple, visual model of 2016/17

polymaff

See post #8

kidmugsy

polymaff wrote: »

* The last £5,000 of dividend income above the £11,000 line is taxed at 0%..

I take it that by "last" you mean 'nearest the top of the column'?

OK, here's my hypothetical taxpayer. Salary £8k; taxable interest £600; dividends £40k.

Starting from the bottom of the column: the salary and the interest fall below the £11k line, therefore tax rate on them = 0%. Then there's also £2,400 of dividends below the £11k mark, therefore their tax rate is also 0%.

Next there's a £32k tranche of divis reaching up to £43k line, so its tax rate = 7.5%. Then there's the remaining divis i.e. (£40k - £2,400 -£32k) = £5,600. This divides into two parts: (i) the £600 nearest to the £43k line: tax rate = 32.5%, and (ii) the top £5,000 with its tax rate of 0%.

so first tranche of tax to pay = £32k x 0.075 = £2,400
plus the second tranche = £600 x 0.325 = 195

Therefore total £2595.

Can that be right?

Update: I see a problem. "*The last £5,000 of dividend income above the £11,000 line is taxed at 0%": did you mean exactly that or did you mean 'The highest £5,000 of dividend income above the £11,000 line but below the £43k line is taxed at 0%"?

MoneySavingUser

I think this is incorrect, It is the first £5,000 of dividend income which is taxed at 0%.

For simplicity, lets say that you have £5,000 of your basic rate band left and have £10,000 of dividends to tax.

The £5,000 dividend allowance is set against the remaining £5,000 of the BRB and the remaining £5,000 of dividends are then in the higher rate so are taxed at 32.5%.

See: https://www.gov.uk/government/publications/dividend-allowance-factsheet/dividend-allowance-factsheet

Example 6

“I have a non-dividend income of £40,000, and receive dividends of £9,000 outside of an ISA”
Of the £40,000 non-dividend income, £11,000 is covered by the Personal Allowance, leaving £29,000 to be taxed at basic rate.
This leaves £3,000 of income that can be earned within the basic rate limit before the higher rate threshold is crossed. The Dividend Allowance covers this £3,000 first, leaving £2,000 of Allowance to use in the higher rate band. All of this £5,000 dividend income is therefore covered by the Allowance and is not subject to tax.
The remaining £4,000 of dividends are all taxed at higher rate (32.5%).

*If you make qualifying pension and/or charitable contributions, raise the £43,000 line by that amount.

The line should be extended by the gross payment so times the amount paid by 100/80;

If income is >£100k then you will need to get rid of or reduce the line at £11,000;

Dazed_and_confused

I get £3800 tax due!

Seems most beneficial to utilise the personal allowance against salary and dividends (£3k).

This leaves £600 interest and £37k dividends to be taxed.

£600 interest taxed at 0% (savings starter rate band) = 0
£5000 dividends taxed at 0% (dividend allowance rate band) = 0
£26400 dividends taxed at 7.5% (balance of basic rate band available after deducting that already used above) = 1980
£5600 dividends taxed at 32.5% = 1820

Total payable is 0+0+1980+1820=3800

kidmugsy

Dazed_and_confused wrote: »

I get £3800 tax due!

Using polymaff's model, or your own?

I have no model of my own, I'm just trying to see what polymaff's implies. Once I'm clear on what he's saying then perhaps I'll try to work out what is true (though the truth for 17/18 is of more interest to me than the truth for 16/17). But I've no reason to believe that I am bound to do better than, or as well as, polymaff.

My conclusion: shoot 'em all - this is an absurd way to run an income tax system.

grey_gym_sock

polymaff wrote: »

* The last £5,000 of dividend income above the £11,000 line is taxed at 0%.

well, i thought it was first, not last. what prompted you to make this change in your model?

that is a separate issue (at least in my mind) from the possibility (which you mentioned in another thread, and which "Dazed and confused" is applying in post #4 above) that the personal allowance works in a new way starting for 2016/17, viz. that it's applied against whichever kind of income makes your income tax bill the lowest, instead of applied against the income below the £11,000 line in your model. the latter change has clearly not been incorporated in your model. do you think it should be?

so, basically, i thought i understood how this worked, and that your model captured it correctly (except for incomes over £150,000, which you aren't attempting to cover). and now each of the above 2 issues leave me unsure on both counts: unsure how the tax system works, and unsure whether your model is (still) right. happy days

WARNING: The results you get from the above will, in certain circumstances, not match those resulting from your submitting an online self-assessment via HMRC. This is because, by their own admission, and after over 20 attempts, HMRC's own software does not correctly address certain scenarios, the most serious of which is "Non-savings income of less than the Personal Allowance (PA) & Savings Starting Rate (SSR) plus savings income not covered by the Personal Savings Allowance (PSA)". They suggest that you make a paper return as their current timescale for addressing this and other bugs in their own software is: "Planned fix for 17/18".

well, that's easier to understand: HMRC getting it wrong

in effect, they're saying that their online self-assessment system doesn't apply the SSR at all, aren't they? i.e. in terms of your model, the online system is effectively just omitting the following rule:

* Any taxable savings income below the £16,000 line is taxed at 0%.

grey_gym_sock

a third issue:

polymaff wrote: »

* If the total column exceeds the £43,000 line then up to a further £500 of taxable savings income is taxed at 0%.

is that the first or last (remaining) £500 of taxable savings? i thought it was the first £500, but should it (newly for 2016/17) be the last? (that would be consistent with the other 2 issues / possible changes, in that it would be applying an allowance/band in the way that saves the most tax.)

polymaff

I hope that this addresses all of you.

This issue is all about the new ability to optimise liability by spreading "deductions and allowances" across taxable income. For this, my references were Section 5 of SA110, (2017) - the worksheet for computing your income tax liability - and HMRC on the telephone. I interpreted the sentence "If it's more beneficial to move deductions and allowances to dividends in the higher rate range to increase tax at the basic rate, but reduce tax at the higher dividend rate this working sheet may not give the correct answer", after speaking to HMRC, as meaning that you are permitted to "float" the Dividend Allowance from one end to the other of the dividend income so that you paid more at basic rate, but less at higher rate. I doesn't appear to be the way HMRC has implemented it. As Dazed and Confused writes, HMRC makes the liability £3,800 and that is the majority of the difference between Kidmugsy's and HMRC's calculation. In summary the change from "first" to "last" was an artifice that dealt neatly with this implied "float". For the majority there would be no difference between "first" and "last"

I also questioned HMRC on the meaning of the "etc." on the earlier HMRC sentence "Because it may be more beneficial for some customers to now have (some of) their deductions and allowances from box A125 allocated against dividend income before savings income etc.". Was that "etc." meaning other sources taxed as savings or did it mean other types of income (implying taxable non savings income)? They said the former, when, for online self-assessment, it appears to be the latter. This made me focus on savings-dividend optimisation, which blinded me (my fault!) to the way that bits of personal allowance can be skipped from taxable non-savings, over taxable savings, to dividend income.

You'll note the Pilate-like "this working sheet may not give the correct answer" at the end of the quote from SA110 (2017)! What, indeed, is truth? To limit confusion, I'll delete the latest version of the model - which only attempts to cover a very small number of extra cases. The original still works, I think, for the great majority of tax-payers - just not for directors of Kidmugsy Limited

polymaff

kidmugsy wrote: »

My conclusion: shoot 'em all - this is an absurd way to run an income tax system.

Agreed - major changes without recognising the increased risk is just daft.

polymaff

grey_gym_sock wrote: »

is that the first or last (remaining) £500 of taxable savings? i thought it was the first £500, but should it (newly for 2016/17) be the last? (that would be consistent with the other 2 issues / possible changes, in that it would be applying an allowance/band in the way that saves the most tax.)

First...........

Dazed_and_confused

I wholeheartedly agree that this is turning into a farcical number of known unknowns.

Until polymaff's posts this afternoon I would never have considered putting the dividend allowance last, primarily because i don't view it as an actual "allowance" in the traditional way as it is really a 0% rate band.

I think there's undoubtedly scope for more confusion here before a definitive answer is known.

For the moment I'm sticking by £3800 as the tax due even though this is a massive difference (nearly 50%) to the £2595 kidmugsy calculated.