Tax on notional dividends query

corum_uk67

Can someone clarify whether there are any HMRC tax rules that apply to notional dividends?

I understand that dividends paid out in a tax year that are over £2k are taxable, e.g. for an etf such as ISF.L, but what about accumulating etf's such as IJPH where the dividend is automatically reinvested?

I've read somewhere that accumulating funds are taxed at source before the notional dividend is reinvested but i'm not sure if this is talking about corporation tax or HMRC income tax?

Also, if accumulating funds do have tax deducted at source, does wrapping it in an ISA make any difference to the tax on the notional dividend?

Thanks!

eskbanker

All dividends (outside ISAs) are subject to taxation, even if reinvested (whether via acc funds or manually for shares, etc), rather than being taxed at source. Where have you read otherwise?

Technically, dividends up to the £2K annual allowance are still taxed, but at 0%....

xylophone

https://www.barclays.co.uk/smart-investor/investments-explained/funds-etfs-and-investment-trusts/funds-income-or-accumulation-units/

Tax

When a fund is held in a tax-efficient account like an ISA or SIPP there’s no income tax, capital gains tax (CGT) or dividend tax to worry about. However, outside these shelters you need to be aware of the implications of your choice of units. Income that’s ‘rolled up’ into your accumulation units is known as a ‘notional distribution’ and is taxable in the same way as the distributions from income units


Any dividends that are automatically reinvested can be used against your dividend income tax-free allowance, which is £5,000, although it’s due to drop to £2,000 in April 2018. That means that if total dividends received/reinvested exceed this amount you may have tax to pay. For income-paying funds where the income is classed as interest, you wouldn’t pay tax up to the new £1,000 interest allowance for basic rate tax payers, introduced in 2016. The allowance for higher rate taxpayers is only £500 and additional rate taxpayers have no allowance at all. Remember, this covers all interest that you receive on cash as well as investments, and once the interest you receive exceeds your allowance it’s subject to income tax.

corum_uk67

OK so taking a quote from the barclays site, it says

"income that’s ‘rolled up’ into your accumulation units is known as a ‘notional distribution’ and is taxable in the same way as the distributions from income units"

but what I don't understand is at what point is the tax taken/paid for the notional distributions? I've had a few grand invested in such an etf for a couple of years now but don't recall ever receiving a statement on the value of 'notional distributions' received. Conversely, dividend payments for my non accumulating etf's are clearly shown on my statements.

xylophone

Have a look at this but bearing in mind it was written before the "dividend allowance" regime.

https://monevator.com/income-tax-on-accumulation-unit/

corum_uk67

Thanks, yes that was one of the pages i saw whilst searching around earlier. It suggests that the re-investments in an accumulating fund are made net of tax. But then my question would be 'but who deducts the tax'. Is it the fund managers, or my brokers perhaps? If its the fund managers what happens when I have an accumulating fund inside an ISA, surely then the notional distributions for re-investment would then be exempt from tax, but the fund managers aren't going to know whose exempt and who isn't, surely.

I guess what i'd like to know is whether notional distributions are subject to income tax deductions when wrapped up in an ISA.

IanManc

corum_uk67 wrote: »

Thanks, yes that was one of the pages i saw whilst searching around earlier. It suggests that the re-investments in an accumulating fund are made net of tax. But then my question would be 'but who deducts the tax'. Is it the fund managers, or my brokers perhaps? If its the fund managers what happens when I have an accumulating fund inside an ISA, surely then the notional distributions for re-investment would then be exempt from tax, but the fund managers aren't going to know whose exempt and who isn't, surely.

I guess what i'd like to know is whether notional distributions are subject to income tax deductions when wrapped up in an ISA. I'm sure I read somewhere earlier today that this was the case, but can't find the site again for now.

The Monevator article is out of date. It suggests that reinvestments are made net of tax for basic rate taxpayers because the article was written in 2011. At that time dividends came with a notional 10% tax credit which meant that basic rate taxpayers didn't have to pay any extra income tax on them.

That has now changed. There are no notional tax credits and the dividends - whether paid out or accumulated - are taxable for everyone. However, the £2000 nil rate band for dividends was also introduced when the notional tax credits were abolished, so there is no tax charge for your dividends up to that sum.

No income tax deductions are made either inside or outside and ISA before a dividend is paid out or accumulated.

Tom99

If you have over £2,000 dividend including accumulated dividend it's up to you to declare this to HMRC either as part of your SA return if you do one, or as a one off notification per year.
I opted for doing a SA because HMRC make such a mess up of trying to collect savings tax via PAYE.

Dazed_and_confused

There are a number of situations where having dividends of less than £2,000 do actually increase your tax liability and the dividend income should really be reported to HMRC however it's fair to say that going by gov.uk they don't expect you to notify them in these situations.

https://www.gov.uk/tax-on-dividends

You do not need to tell HMRC if your dividends are within your dividend allowance for the tax year.