Dividend taxation a bit out?

Kenhere

The rules for dividend taxation suggest that if your total income puts you in the Basic Rate income tax band, you pay 7.5% on dividend income, and if you are in the Higher Rate Band 32.5%, and Additional rate 38.1%.

The Gov site https://www.gov.uk/tax-on-dividends says "the tax you pay depends on which Income Tax band you’re in. Add your income from dividends to your other taxable income when working this out."

This suggests Dividend income is included in calculating your income Tax Band. So if your only income is £50,000 dividends then the Tax Band is Higher Rate and the dividends are taxed 32.5%.

But having checked various working examples and help sheets I think the correct caclulation is to subtract the universal £2,000 dividend allowance giving £48,000 x 7.5% (the Basic Rate Band) = £3,600.

So:

Shouldn't the Gov site say "the tax you pay depends on which Income Tax band you’re in. Do not include your income from dividends to your other taxable income when working this out."?

I checked my maths with a couple of online calculators and both give £3,762.50 (2017/18).Why is the tax shown £162.50 higher than 7.5% x £48,000?

This also suggests that the Personal Allowance for income tax £11,500 (2017/18) cannot be applied to Dividend income? So if you have no other income this allowance is "lost"?

agrinnall

Kenhere wrote: »

Shouldn't the Gov site say "the tax you pay depends on which Income Tax band you’re in. Do not include your income from dividends to your other taxable income when working this out."?

Why do you think this? Dividend income is income, so why wouldn't it be included when calculating what your marginal tax rate is?


As for your calculations, we'd need to know what your non-dividend income and your tax code is to work out what the correct figure is.

polymaff

I guess that you're now more than fully clued up on these issues, Kenhere.

Berkshire_Beancounter

A couple of points - if you're looking at 2017-18 the dividend allowance for that year was £5,000 not £2,000 - it changed in 2018-19 to £2,000.

And if the total income was £50,000 part of this would be charged at the basic rate and part at the higher rate. The £11,850 personal allowance does apply, even with dividends.

The dividend allowance doesn't reduce income for tax purposes but does mean that you don't pay tax on the first £5,000 of dividends.

So if the total income was £50,000 in 2017-18, all from dividends:

Total income £50,000
Less personal allowance of £11,500
Income chargeable to tax £38,500

This is charged at £33,500 @ 7.5% = £2,512.50
Then the remaining £5,000 @ 32.5% = £1,625
Total of the above = £4137.50

BUT remember you don't pay tax on the first £5,000 of dividends - in this case at the lower rate of 7.5% = £375

So deducting £375 from £4137.50 gives you £3762.50.

I feel like Carol Vorderman or Rachel Riley on Countdown!

Linton

The dividend allowance was £5K in 2017/18. It reduced to £2K in 2018/19.



So for 2017/2018:

Dividend income in 2017/2018: £50000
Minus personal allowance: £38500
Tax on £33500 (basic rate):
£5000 at 0%
£28500 at 7.5%=£2137.5
Tax on £5000 (higher rate):
£5000 at 32.5%=£1625


Total tax: £3762.5


Note - the dividend allowance isnt an addition to the personal allowance but rather a zero rate tax band.

00ec25

Linton wrote: »

Dividend income in 2017/2018: £50000
Minus personal allowance: £38500
Tax on £33500 (basic rate):
£5000 at 0%
£28500 at 7.5%=£2137.5
Tax on £5000 (higher rate):
£5000 at 32.5%=£1625

this shows the correct mechanics of the calculation, as Linton says the allowance is a 0% band, not a deduction. It counts as part of taxable income so it "uses up" some of the basic rate 33,500 band hence, as he shows, 5,000 + 28,500 gets you to the 33,500 basic rate threshold (17/18 rates)

polymaff

Linton wrote: »

This is charged at £33,500 @ 7.5% = £2,512.50
Then the remaining £5,000 @ 32.5% = £1,625
Total of the above = £4137.50

BUT remember you don't pay tax on the first £5,000 of dividends - in this case at the lower rate of 7.5% = £375

So deducting £375 from £4137.50 gives you £3762.50.

I feel like Carol Vorderman or Rachel Riley on Countdown!

Don't expect it to look like that in HMRC's documentation, though. The SA302 would, more rationally, report that computation as:

Dividends from companies etc
Basic rate at nil rate ... £5,000.00 x 0% ......... £0.00
Basic rate .............. £28,500.00 x 7.5% ... £2,137.50
Higher rate .............. £5,000.00 x 32.5% .. £1,625.00

Kenhere

Thank you all. Much clearer now!

Berkshire_Beancounter

polymaff wrote: »

Don't expect it to look like that in HMRC's documentation, though. The SA302 would, more rationally, report that computation as:

Dividends from companies etc
Basic rate at nil rate ... £5,000.00 x 0% ......... £0.00
Basic rate .............. £28,500.00 x 7.5% ... £2,137.50
Higher rate .............. £5,000.00 x 32.5% .. £1,625.00

You're right....I had to go out at lunchtime and having started the post, was trying to get it completed before I went out, if I'd had time I would have tried to get it in the HMRC format.