A simple, visual model of 2016/17

bigadaj

Not sure on the tax calculation issue but the 60% tax relief on pension contributions on salary looks attractive, though much of this may well be paid at some time in the future if income levels remain the same.

grey_gym_sock

Richard_1963 wrote: »

Employment £17,000
Savings Interest £12,000
Dividends £90,000
Total = £119,000
Personal allowance reduced from £11,000 to £1,500
Basic Rate = £32,000

HMRC and Andica calculate tax due as
Employment £15,500 @ 20% = £3,100
Savings £500 @ 0% + £11,500 @ 20% = £2,300
Dividends £5,000 @ 0% + £5,000 @ 7.5% + £80,000 @ 32.5% = £26,373
Total tax = £31,775

hmmm ... that calculation appears to be using a basic rate band of £37,500 (i.e. £15,500 + £500 + £11,500 + £5,000 + £5,000) ... which would be correct if you have £5,500 of pension contributions and/or gift aid (since they widen the basic rate band) ... and IMHO, if that widening of the BR band is correct, then that calculation is the right answer.

Alternative
Dividends £5,000 @ 0% + £32,000 @ 7.5% + £53,000 @ 32.5% = £19,625
Employment £0 @ 20% + £15,500 @ 40% = £6,200
Savings £500 @ 0% + £11,500 @ 40% = £4,600
Total tax = £30,415

Is the alternative a valid method and, if so, how do you ensure HMRC use this method?

AIUI, it's not valid, because the only allowance or band you are allowed to apply in the most beneficial way is the personal allowance - of just £1,500, in your case.

you can't choose to use the basic rate against dividends, instead of against employment and savings income.

and you can't choose to use the £5,000 dividend allowance against dividends that would otherwise be taxed at the higher rate - it must be used against the lowest £5,000 of dividends (other than any dividends against which the personal allowance is used).

if you mostly follow the HMRC/Andica approach, except that you choose to set £1,500 personal allowance against savings interest instead of employment income, it would make no difference in total tax due. and if you instead set the £1,500 against dividends, you'd have more tax due. so there's no advantage in making those (permitted) choices.

however, this is all on the assumption that the apparent £5,500 widening of the BR band is correct. if it isn't correct, then the default method is as dazed&confused gave it:

Dazed_and_confused wrote: »

£15,500 x 20% = £3100 (employment)
£500 x 0% = £0 (personal savings allowance)
£11500 x 20% = £2300 (balance of savings income)
£5000 x 0% = £0 (dividend allowance)

That has now used up all of your basic rate band (PSA and dividends allowance use this a up if within the standard basic rate band) and the remaining dividends are all then taxable at the dividend higher rate
£85,000 x 32.5% = £27,625

Total due is 3100 + 0 + 2300 + 0 + 27625 = £33025

but in this case, it would be more beneficial (and permitted) to use the £1,500 personal allowance against dividend income instead, giving you:

£17,000 x 20% = £3400 (employment)
£500 x 0% = £0 (personal savings allowance)
£11500 x 20% = £2300 (balance of savings income)
£5000 x 0% = £0 (dividend allowance)

the basic rate band (since we're assuming it's only £32,000) was used up part way through the dividend allowance, so the remaining dividends are all then taxable at the dividend higher rate
£83,500 x 32.5% = £27,137.50

Total due is 3400 + 0 + 2300 + 0 + 27137.50 = £32,837.50
which is slightly less than the default method.

this is an example of (what i believe is) 1 of the 2 circumstances in which the personal allowance should (on certain conditions) be used against dividends in preference to other kinds of income: namely, when the dividend allowance is sliding past the basic/higher-rate boundary. because in this situation, you can save 32.5% tax on some dividends, in exchange for paying only 20% on some other income.

the reason this doesn't apply in the HMRC/Andica calculation is that, after they have apparently widened your BR band, the dividend allowance is clearly below the basic/higher-rate boundary.

Richard_1963

Great analysis thanks. I hadn't appreciated that it is only the personal allowance that can be optimised.

Overall the tax system needs simplification. But as Yes Minister said "that's a brave decision Minister" so is unlikely to happen.