AMENDED: self assessment error: basic rate div tax not for mortgage interest?

silvercar

Should the restriction to basic rate tax for 25% of the mortgage interest on letting expenses be applied to the dividend income as it is to the earnings tax rate? I would have thought so, in which case I think I may have discovered an error on the self assessment online calculation.

Example:
1. PAYE - £5k
2. letting income £5k (gross £10k, expenses £3k, mortgage interest £2k)
3. Dividends £10k.

Under the new rules for 2017-18, 25% of the mortgage interest goes in that "other" box 3 pages after the letting expenses, so it is restricted to the basic rate.

So my final calculation page has:

PAYE 5k
letting income 5.5k
dividend income 10k
---
other income restrict to basic rate £500

the tax calculation has

PAYE 5k
letting income 5.5k
total 10.5k

10.5k taxed at 0% = 0


dividend income 10k
6k taxed at 0% =0
4k taxed at 7.5% = £300

-£500 restricted to 20 % basic rate = 0.

It is this last line that I am querying, I thought that the restriction to basic rate would be applied to all income, so in this case the dividend income that is taxed at basic rate for dividends should lead to a reduction in the dividend tax at 7.5%.

Dazed_and_confused

You refer to 2017:18 but appear to be getting Personal Allowance of £11,000 not £11,500.

Why is that?

What is the actual total amount payable for 2017:18 i.e. the final figure after all adjustments etc.

Don't include any POA for 2018:19, just the total due for 2017:18

Pennywise

I've just put the data into our software and the tax liability comes out at £1,175 being:-

Employment £10k
Property £5.5k
Dividends £10k Total £25.5k
Less PA £11.5k
Taxable £14k
£4k at 20% = £800
£5k divs at nil - £nil
£5k divs at 7.5% = £375
Total tax £1175
Less BR int relief £500 @ 20% £100
Tax due £1075

Are you sure you've put your interest in the right boxes. I fear you may be putting the £500 in the wrong box. It should be:-

Box 26 £1500
Box 44 £500

Box 44 is "residential finance costs not included in box 26"

polymaff

No - it is a measure solely designed to restrict the amount of Income Tax relief landlords can get on residential property finance costs. It certainly won't reduce your overall tax liability - as you seem to hope.

As you appear to pay no more than basic rate, it doesn't affect your tax liability - hence the final "0" you query.

Dazed_and_confused

Doesnt £800 + £375 = £1,175???

Dazed_and_confused

Polymaff, I clearly need to read up on this, I mistakenly thought the op would get £100 relief in this situation (where more than £100 tax is charged on the rental income).

silvercar

Dazed_and_confused wrote: »

You refer to 2017:18 but appear to be getting Personal Allowance of £11,000 not £11,500.

Why is that?

What is the actual total amount payable for 2017:18 i.e. the final figure after all adjustments etc.

Don't include any POA for 2018:19, just the total due for 2017:18

My error, I will amend.

I was using rounded figures to make life easier, rather than those from my tax return, which includes other irrelevant stuff.

polymaff

AIUI the change this measure introduces over the next four years is that Landlords' finance charges will be steadily and increasingly extracted from the profit calculation and will instead be relieved explicitly.

This means that Landlords will not be able to relieve themselves at their highest tax rate but will receive a direct tax rebate on the lesser of either the interest extracted or their amount of non-savings taxable income taxed at basic rate - at basic rate.

silvercar

polymaff wrote: »

AIUI the change this measure introduces over the next four years is that Landlords' finance charges will be steadily and increasingly extracted from the profit calculation and will instead be relieved explicitly.

This means that Landlords will not be able to relieve themselves at their highest tax rate but will receive a direct tax rebate on the lesser of either the interest extracted or their amount of non-savings taxable income taxed at basic rate - at basic rate.

That was my understanding too, but I thought that dividend income would be relieved at basic rate for basic rate tax payers.

So I have paid tax on dividends and am a basic rate taxpayer and the mortgage interest is an allowable expense restricted to basic rate, but I can't get it back!

Dazed_and_confused

But your example has now been completely changed so you have no tax liability on the rental income.

So I doubt you can get relief in the tax year concerned for the 25% which cannot be claimed as an expense.

Not sure but you may be able to carry this forward against tax payable on future years rental profits.

silvercar

But your example has now been completely changed so you have no tax liability on the rental income.

Except I did because I have had some expense (the 25% of the mortgage interest) which hasn't been allowed to be deducted from the rental income. If it had been deducted I would have had more unused personal tax allowance that I could put against the dividend and then pay less tax on the dividend. To deliver that result the box 44 figure should have had 7.5% tax allowed against it.