8.75% Basic rate tax on dividends

Nomunnofun1

DRS1 said:

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

Yes - I see that. Didn’t get time to delete it! 🙂

dales1

First thing. On your own "base case" calculation of tax due, it shows too much taxed at 20% in the basic rate band, and not enough taxed at higher rates. That's because the "allowances" for interest and dividends are actually zero rate bands of tax, which use up the basic rate band as Dazed has advised above. So your basic calculated tax is too low.

Second thing, the HMRC calculation. It's hard to make precise comment, because we haven't got a paste of the actual figures.

But you will find, as in the example of Jane above, that HMRC will have have allocated part of your personal allowance probably towards Dividends (otherwise taxable at higher rate) rather than Employment (otherwise taxable at 20%). This reduces the tax payable by people in this situation.

If you post actual figures and actual HMRC wording (or rounded actuals) it will be easier to check them.

Eddie__2

Here is the actual wording for those who asked. Tax Calculation for 2023/24                             Per IR Tax Calculation           My comments:

Interest                                                              2000

Dividends                                                           2500

Salary                                                               48270

Total Income Received                                     52770

Minus Personal Allowance                                12570

Total Income on Which tax is Due                     40200

How we have worked out your income tax:

Pay, Pensions,Profit etc:

Basic Rate                                                          37700 @ 20% =  £7540.00  This charges all my basic rate                                                                                                                          income @ 20%, disallowing

any dividends @ 8.75%

Savings Interest from Banks etc:                                                                     But my salary and interest                                                                                                                          after allowances is only

£35700+1500=£37200                                                                                                                           leaving £500 BR    Higher rate band at nil rate                                     500 @ 0% =           £0.00

Dividends from Companies etc:

Basic rate                                                                    0 @ 8.75% =       £0.00  And that £500 should be                                                                                                                            used on dividends @ 8.75%

Higher rate at nil rate                                             1000 @ 0% =            £0.00

Higher rate                                                             1000 @ 33.75% = £337.50

Total Income on Which tax has been charged     40200

Income Tax Charged after allowances and reliefs                             £7877.50

Minus Tax Deducted

Total Income tax Due Put another way, if I had earned no dividends, I would have used £37200 of my £37700 basic rate.

dales1

Those figures from HMRC look OK to me (although their layout is as clumsy and confusing as usual).

Let's go back to your figures from Xmas eve.

The Basic Rate Band of 37,700 can't be allocated as shown (35,700 Sal, 1,500 Int, 500 Divi) because 500 of it is used up by the Savings Allowance 0% band. So the 500 BR shown against Divi falls to zero.

In consequence, another 500 of Divi is chargeable at HR (not BR). An extra 125 on the tax bill, taking your "Base Case" tax bill up from 7821.25 to 7946.25.

(In other words, just like me, you cannot have any Divi taxed at just 8.75% BR, if your Basic Rate Band has been consumed by Salary/Pension and Interest (plus Interest Allowance 0% band).

But secondly, HMC get to work on the Beneficial Ordering of your Personal Allowance.

They have seen that you are paying HR tax on Divi, yet BR tax on your Salary. So it would save tax to allocate Personal Allowance from one to the other. And they have moved 500 of PA in this way, saving 500 x (33.75 - 20%) or 68.75 off the total, bring it down to the 7877.50 shown.

The HMRC printout shows 37700 taxable at 20%, but without explaining that it is made up of Salary 48270 less (PA barring 500 reallocated) of 12070, plus (2000 Savings less the 500 Savings Allowance) of 1500 = 37700.

(The printout shows that the 500 Savings Allowance at 0% is now getting relief from HR tax).

The printout shows that the 1000 Dividend Allowance gets relief from HR tax, and that a further 1000 is chargeable to HR dividend tax. But it fails to show that 500 of Dividends have been entirely relieved of HR tax by way of applying PA transferred from Salary.

So, HMRC seem to have saved you nearly £69 tax, but they have caused plenty of people in our situation a lot of head-scratching, by their total failure to present their calculations in an understandable fashion.

Eddie__2

Thank you very much for the effort you have put into your detailed explanation.  Sorry for my delay in replying, but I am still struggling to understand the logic behind it.

You are quite right that the IR calculation does not explain anything.  I must be having an extended senior moment, because none of it seems logical.

I have written a spreadsheet that has calculated my tax correctly in every previous year, but does not deal with HR tax on dividends in the same way as the IR does.

I don't understand the way that the Savings and Dividend Allowances are applied and how they use up the Basic Rate Band.

You said "The Basic Rate Band of £37,700 can't be allocated as shown (35,700 Sal, 1,500 Int, 500 Divi) because 500 of it is used up by the Savings Allowance 0% band.  So the 500 BR shown against Divi falls to zero."

I thought that the Savings Allowance (£500 for higher rate taxpayers) and Dividend Allowance of £1000 were applied as if they were additional personal allowances for those specific sources of income.

As Nil Rate Bands, I didn't think that they used up any of my £37,700 Basic Rate Band.

You said "The printout shows that the £500 Savings Allowance at 0% is now getting relief from HR tax".

I think the words "Savings HR Band £500 at 0%" mean that the zero rate on Interest has been reduced from £1000 to £500 for Higher Rate Taxpayers, not that it is getting relief from Higher Rate Tax.

My Taxable Pay - PA + Interest before Savings Allowance (£48270-12570+2000) is exactly £37700, less the £500 Savings Allowance @ 0% which reduces the amount of my Basic Rate band used to £37200 leaving £500 for Dividends @8.75%.

I think the words "Divs HR at nil rate" mean that the zero rate on Dividends of £1000 for Higher Rate Taxpayers has been applied, because the next line is "Higher Rate Tax on Divs £1000 @ 33.75%".

What makes you say "They have seen that you are paying HR tax on Divi, yet BR tax on your Salary. So it would save tax to allocate Personal Allowance from one to the other. And they have moved £500 of PA in this way, saving £500 x (33.75 - 20%)...?

I cannot see where this is shown.

Since Higher Rate Tax on Dividends is only 33.75% and HR Tax on Salaries + Interest is 40%, why does it benefit me to transfer PA from Salaries to Dividends?

The IR's switch of £500 (which I cannot see) has still left me with the same £1,000 of Dividends taxed at Higher Rate than in my calculation, so I don't understand how that has saved any tax.

As you can tell, I am still confused.

I can see that since £40,200 is taxable (£1,500 of that at 0%) the Higher Rate will apply to the top £1,000 and £37,700 will be taxed at Basic rate, but I still don't see why all of that is at 20% and none at 8.75%.

Sorry if I am missing something really obvious.

Dazed_and_C0nfused

I thought that the Savings Allowance (£500 for higher rate taxpayers) and Dividend Allowance of £1000 were applied as if they were additional personal allowances for those specific sources of income.
As Nil Rate Bands, I didn't think that they used up any of my £37,700 Basic Rate Band.

That is your basic misunderstanding.  Although someone though it a good idea to call them "allowances", they aren't in the normal sense of the word.

They are 0% tax bands which, to further confuse things, fall within the relevant basic or higher rate band.  As these 0% bands are the first slice of interest or dividends to be taxed (above anything covered by the Personal Allowance) then this means they will use up any remaining basic or higher rate band before the next rate band comes into play.

You might find this worth a read.

https://www.litrg.org.uk/savings-property/tax-savings-and-investments/tax-dividends

Eddie__2

Thank you all for your persistence when I did not understand your explanations, without which I would never have guessed how the IR work out the tax on dividends at the high rate. I have now amended my spreadsheet to match.

Who would have thought that the Savings and Dividend Allowances were not actually "allowances", and, although at zero rate, counted as part of your Basic rate?

None of this, or the beneficial allocation of Personal Allowances over income categories, is properly explained by the HMRC.