Dividend Tax Confusion

JLRetired

Despite reading numerous threads, articles, etc. I am still confused by my tax calculation for 2017&18. I took voluntary redundancy during that year and so my earned income was £85,342. I had savings interest of £838 and dividend income of £2665. I made gift aid payments of £2005. What should my tax liability be?

bowlhead99

Assuming you get the standard personal allowance of £11500 for that year, on the incomes above you'd normally pay,:

0% on the first £11500 of your earned income
20% on the next £33500 of your earned income (£6700)
40% on the last £40342 of your earned income (£16137)
0% on the first £500 of interest income ('personal savings allowance')
40% on the last £338 of interest income (£135)
0% on the £2665 of dividend income (below 'dividend allowance' of £5000 for 17/18)

Your £2005 gift aid payments would have resulted in the charity getting a gross contribution of £2506 after they claim the basic rate tax relief. That means you have paid £2005 net for a £2506 donation even though as a 40% rate taxpayer it should have cost you only £1504 net; so you can reclaim the £501 of additional tax through your return.

So the tax you needed to pay for the year is 6700+16137+135 -501 = 22471 give or take a few pounds of rounding differences.

If you are trying to get the numbers to match HMRCs line-by-line, the practical way they deal with the gift aid is to extend your basic rate band for the gross contribution you made, so that you pay 20% tax on an extra £2506, but then avoid paying 40% tax on that £2506, with the net result that you get 20% of £2506 'back' (the £501) without them showing the £501 as a separate negative figure.

But based on the title of this thread, you only actually wanted to know your liability for tax on the dividends? It's £0.

It wouldn't be £0 in 2018/19 when the allowance drops from £5000 to £2000. And it may not have been effectively £0 if you had been close to some tax rate boundary (eg if you had over £100k income and your personal allowance tapered down due to receiving extra income; or if receiving the dividends moved your total income up to a level that caused you to lose part or all of the personal savings allowance that you had hoped to use on your interest income, etc...)

Does that clear it up?

JLRetired

Thank you for the comprehensive reply, it is extremely helpful. The results of your calculation match mine, but not that of the HMRC who insist that I owe them over £585. On my third phone call to them I finally spoke to someone who knew what they were talking about and he agreed with my calculation. However when I returned from a 2 week holiday on 30th January I had received a letter saying that the original calculation was correct, so I paid up. You’ve confirmed that I should continue to challenge them. It doesn’t help that each one of their statements and letters expresses the calculation differently.
The heading is because I think it is the handling of the dividend that is causing the problem.
Many thanks.

Edi81

The first £30k of your redundancy is tax free.

JLRetired

Thanks. I had factored that in.

Dazed_and_confused

Are you able to provide more information about the HMRC calculation?

Was it from you completing a Self Assessment return or was it a P800?

How much do you think the correct tax owed figure should be? The overall figure, not just on dividends.

Is it about £200 different to the £585 say is due?

And how much tax was deducted from your earnings?