8.75% Basic rate tax on dividends

Eddie__2

As I understand it, the basic rate of tax on dividends is 8.75% and does not revert to 20% if you fall into the higher rate bracket.  So why has the Inland Revenue's Self Assessment calculation charged my Total Taxable Income for 23/24 (including dividends) at 20% and none at 8.75% before correctly applying 33.75% (the higher rate on dividends) to my excess dividend income?

Can there be an error in their calculation and if so, is every higher rate dividend earner being overcharged, or have they just picked on me? 

Dazed_and_C0nfused

Eddie__2 said:

As I understand it, the basic rate of tax on dividends is 8.75% and does not revert to 20% if you fall into the higher rate bracket.  So why has the Inland Revenue's Self Assessment calculation charged my Total Taxable Income for 23/24 (including dividends) at 20% and none at 8.75% before correctly applying 33.75% (the higher rate on dividends) to my excess dividend income?

Can there be an error in their calculation and if so, is every higher rate dividend earner being overcharged, or have they just picked on me? 

There might be an error in the calculation.

But it's more likely you have misunderstood something.

The first £500 of dividend income is always taxed at 0% and that will use some of your basic rate tax band (if you have any available).

Can you copy and paste the bottom section of your calculation, the bit where the income left after (usually just) the Personal Allowance is deducted?

Eddie__2

They have taxed me 0% on the first £1000 of dividends (correct for 23/4) (and also bank interest, reduced to £500 for higher rate taxpayers).  For dividends, they quote:
 "Basic Rate £0 x 8.75% - £0
 Higher rate band at nil rate £1000@0% = £0
 Higher rate £x x 33.75% = £y"
Because the first line is "Pay, Pensions, Profit etc.    Basic Rate (say) £37700 x 20% = z"

I would rather not share actual figures in the public forum.
By taxing my total earnings including dividends at 20%, there is none left to tax at 8.75%. I think they should have excluded dividends from that line. 

My question was, is there some obscure rule that says, if you go into the higher tax bracket, although higher rate dividends get taxed at 33.75%, the basic rate reverts to 20%?


 

TheSpectator

Eddie__2 said:

They have taxed me 0% on the first £1000 of dividends (correct for 23/4) (and also bank interest, reduced to £500 for higher rate taxpayers).  For dividends, they quote:
 "Basic Rate £0 x 8.75% - £0
 Higher rate band at nil rate £1000@0% = £0
 Higher rate £x x 33.75% = £y"
Because the first line is "Pay, Pensions, Profit etc.    Basic Rate (say) £37700 x 20% = z"

I would rather not share actual figures in the public forum.
By taxing my total earnings including dividends at 20%, there is none left to tax at 8.75%. I think they should have excluded dividends from that line. 

My question was, is there some obscure rule that says, if you go into the higher tax bracket, although higher rate dividends get taxed at 33.75%, the basic rate reverts to 20%?


 

Without some figures it's impossible to give an answer. Don't get this 'don't want to post in a public forum', as if you could be identified from it.

Some of us have access to software to run the figures through.

Dazed_and_C0nfused

Eddie__2 said:

They have taxed me 0% on the first £1000 of dividends (correct for 23/4) (and also bank interest, reduced to £500 for higher rate taxpayers).  For dividends, they quote:
 "Basic Rate £0 x 8.75% - £0
 Higher rate band at nil rate £1000@0% = £0
 Higher rate £x x 33.75% = £y"
Because the first line is "Pay, Pensions, Profit etc.    Basic Rate (say) £37700 x 20% = z"

I would rather not share actual figures in the public forum.
By taxing my total earnings including dividends at 20%, there is none left to tax at 8.75%. I think they should have excluded dividends from that line. 

My question was, is there some obscure rule that says, if you go into the higher tax bracket, although higher rate dividends get taxed at 33.75%, the basic rate reverts to 20%?


 

Fair point re the dividend nil rate band being £1,000 for 2023-24.

But the line in bold indicates you have already used all of your basic rate band.  Or are you saving the £37,700 includes dividend income?

MattMattMattUK

Does your PAYE salary take you into the higher rate band?

dales1

Take a look at https://www.gov.uk/hmrc-internal-manuals/savings-and-investment-manual/saim1110

On there, it says that Dividends are taxed as the highest slice of income.

So in the case of the example given, Jane would be liable to higher rate dividend tax on all dividends above the dividend allowance (... and hence none of it at basic rate dividend tax). 

So HMRC use some personal allowance against that band of dividends (otherwise taxed at 33.75%) rather than being used against employment income (otherwise taxed at 20%).

(The corollary is that Jane has paid no tax at the 8.75% basic rate, because she has no basic rate band left).

I'm in the same situation myself, and I have to say that the HMRC tax calculation is most obscure and fails to make any attempt to explain what is happening.

(PS for simplicity I've ignored the odd £500 of basic rate band in Jane's example).

Eddie__2

Let's use these for ease of calculation:  Presuming Dividends are treated as the top slice of income.
                          Salary  Interest  Dividends   Total
Gross                48270      2000       2500     52770
Personal Allce -12570                                 -12570
                         ---------------------------------------------  
Taxable             35700      2000       2500     40200 So Higher Rate applies
Savings Allce                     -500                      -500
Divs Allce                                       -1000      -1000
                         ---------------------------------------------  
Total Taxable                                                38700
Basic Rate        35700      1500         500   -37700 
                         ---------------------------------------------
Higher Rate              0            0        1000     1000  

I calculate the tax as:
Basic Rate Tax   7140        300       43.75 7483.75  @ 20% on Salary + Interest, @ 8.75% on Dividends
Higher Rate Tax       0            0     337.50   337.50   @ 33.75% on Dividends
                         ---------------------------------------------
Total Tax                                                   7821.25

But per IR:
BR Tax on               £37700 @ 20%        7540.00  Total Basic Rate Band including Dividends @ 20%   Why?
Savings HR band       £500 @ 0%               =    0   I agree
Divs BR                  £        0 @ 8,75%          =    0  Why?
        HR @ nil rate £  1000 @ 0%               =    0  I agree
HR Tax on Divs      £  1000 @ 33.75%     337.50  I agree
                         ---------------------------------------------
Total Tax                                                  7877.50   
The difference is (20-8.75)% on £500 =     56.25 

I am grateful for your comments and I would like to know what your software calculates.
If I am right, how many others have been over-taxed, assuming that IR can't be wrong?

TheSpectator

Suggest you look at this - https://www.mandg.com/wealth/adviser-services/tech-matters/investments-and-taxation/income-tax-key-facts/income-tax-rates

Particularly the examples and this para -  'Dividends within the nil rate will still count towards an individual’s basic or higher rate band and may therefore affect the rate of tax paid on dividends in excess of £500'

Eddie__2

Thanks for the link.  The final sentence seems to support my calculation of the use of 8.75%.  
It says:
"This leaves £7,850 of income that can be earned within the basic rate limit before the higher rate threshold is crossed. Remember that regardless of whether Fred is a Scottish taxpayer, when taxing these dividends, the Scottish threshold is ignored and instead the UK threshold applies. The dividend nil rate covers the first £500. The remaining £7,500 of dividends are taxed as follows – £7,350 at 8.75% and £150 taxed at 33.75%."

DRS1

Nomunnofun1 said:

Eddie__2 said:

Thanks for the link.  The final sentence seems to support my calculation of the use of 8.75%.  
It says:
"This leaves £7,850 of income that can be earned within the basic rate limit before the higher rate threshold is crossed. Remember that regardless of whether Fred is a Scottish taxpayer, when taxing these dividends, the Scottish threshold is ignored and instead the UK threshold applies. The dividend nil rate covers the first £500. The remaining £7,500 of dividends are taxed as follows – £7,350 at 8.75% and £150 taxed at 33.75%."

Without delving too deeply, how do you have £7850 of basic rate band remaining after salary when you consider that it alone utilises 35700 of 37700?

No He's quoting from the M&G document