What is included in Taxable Income?

Phantom_Investor

Hello all, I'm struggling to find a financial advisor who can help before the 5th April deadline, so I'm hoping somebody can give me a view on the following:

In the past month, I have paid for the liquidation of a limited company (with cash assets of around £95k) of which I was the director and sole shareholder. This was done by paying myself a dividend of £45k, then the company disposed of the remaining assets of £40k by making a payment to myself (as the sole shareholder).

My expectation is that I will pay tax on the £40k dividend, and CGT on the £40k, but benefitting from Business Asset Disposal Relief.
I have had no other income apart from a small amount of bank interest.

So, will HMRC consider this to be a taxable income of £95k, and therefore I will be treated as a high-rate taxpayer, and therefore benefit from 40% tax relief on a payment into my SIPP?

If so, what would be the maximum I can pay into my SIPP? Is it the £60k cap, or is it £45k - i.e. the value of the dividend? 

Many thanks in advance for any input. 

Nomunnofun1

Dividends are not treated as income for the purposes of pension contributions.

Dazed_and_C0nfused

Phantom_Investor said:

Hello all, I'm struggling to find a financial advisor who can help before the 5th April deadline, so I'm hoping somebody can give me a view on the following:

In the past month, I have paid for the liquidation of a limited company (with cash assets of around £95k) of which I was the director and sole shareholder. This was done by paying myself a dividend of £45k, then the company disposed of the remaining assets of £40k by making a payment to myself (as the sole shareholder).

My expectation is that I will pay tax on the £40k dividend, and CGT on the £40k, but benefitting from Business Asset Disposal Relief.
I have had no other income apart from a small amount of bank interest.

So, will HMRC consider this to be a taxable income of £95k, and therefore I will be treated as a high-rate taxpayer, and therefore benefit from 40% tax relief on a payment into my SIPP?

If so, what would be the maximum I can pay into my SIPP? Is it the £60k cap, or is it £45k - i.e. the value of the dividend? 

Many thanks in advance for any input. 

Why do you think you can contribute more than £3,600 (inclusive of basic rate tax relief the pension provider will add) to a pension in the current tax year?

From your post I suspect getting advice (not from FA though, why not an IFA?) was something you should have done before moving money out of the company.

NB. Capital Gains are not "income" for income tax purposes.

Nomunnofun1

Is the dividend £40k or 45k and how does one arrive at £95k total income?

Dazed_and_C0nfused

Nomunnofun1 said:

Is the dividend £40k or 45k and how does one arrive at £95k total income?

There are a few discrepancies in this tale!

I'm intrigued where the other £10k went.  Or is it the other £15k 🤔

In the past month, I have paid for the liquidation of a limited company (with cash assets of around £95k) of which I was the director and sole shareholder. This was done by paying myself a dividend of £45k, then the company disposed of the remaining assets of £40k by making a payment to myself (as the sole shareholder).

My expectation is that I will pay tax on the £40k dividend, and CGT on the £40k, but benefitting from Business Asset Disposal Relief.

Phantom_Investor

Oh dear. My apologies...basic arithmetic error and a typo!.....it should have been £85k, including a £45k dividend

In answer to the question "Why do you think you can contribute more than £3,600 "....because my understanding (from gov.uk) is:  Tax relief is limited to relief on contributions up to the higher of (i) 100% of your UK taxable earnings or (ii) £3,600

So this is why I was asking the question. If the dividend of £45k equates to taxable earnings of £45k, then presumably I am not limited to a cap of £3,600?

Thanks for confirming that Capital Gains are not "income" for income tax purposes. I guess that also means that even if the £45k dividend IS considered "income" then that doesn't put me in the higher tax bracket anyway.

Phantom_Investor

Nomunnofun1 said:

Dividends are not treated as income for the purposes of pension contributions.

But I now notice that Nomunnofun1 has already answered my question!

Grumpy_chap

It would seem as though the OP had negligible, if any, earned income.
Pension contributions can only be made from earned income.
The only obvious exception would be employer pension contributions.
Did the OP take any advice for the winding up process of the Ltd Co. - even an Accountant should have been able to advice on tax efficient cessation and pension contributions as a part of that.
The other obvious thing with winding up is timing the way funds are drawn to cross different tax years.

Phantom_Investor

Thanks to you all for your time and input.

I did take advice before winding up the company - my situation is much more complicated than I shared. I kept it simple to seek answers to what I thought were fairly simple questions. I think I now do have those answers, but I am still a mite confused!

Reading the responses again, a summary of the answers from you kind folk: 

1. Capital Gains are not "income" for income tax purposes.
2. Pension contributions can only be made from earned income
3. Dividends are not treated as income for the purposes of pension contributions. .

I half-expected (1) to be the case so no confusion there.

For 2 and 3...HMRC doesn't appear to recognise the concept of "earned income". The rule published on gov.uk is "Tax relief is limited to relief on contributions up to the higher of (i) 100% of your UK taxable earnings or (ii) £3,600".
In the HMRC calculations from my past self-assessment returns, dividends are added to my 'earned income' to give 'Total income on which tax is due'. I assumed that the "total income on which tax is due" equates to "taxable earnings''. Why would anybody assume anything different?!

Is this just an example of HMRC tax guidance being wrong and/or misleading?
Or perhaps (as some of you seem to be saying) it's an example of why people like me shouldn't try and understand this stuff, and just pay somebody who knows the actual taxation rules?

Dazed_and_C0nfused

Phantom_Investor said:

Thanks to you all for your time and input.

I did take advice before winding up the company - my situation is much more complicated than I shared. I kept it simple to seek answers to what I thought were fairly simple questions. I think I now do have those answers, but I am still a mite confused!

Reading the responses again, a summary of the answers from you kind folk: 

1. Capital Gains are not "income" for income tax purposes.
2. Pension contributions can only be made from earned income
3. Dividends are not treated as income for the purposes of pension contributions. .

I half-expected (1) to be the case so no confusion there.

For 2 and 3...HMRC doesn't appear to recognise the concept of "earned income". The rule published on gov.uk is "Tax relief is limited to relief on contributions up to the higher of (i) 100% of your UK taxable earnings or (ii) £3,600".
In the HMRC calculations from my past self-assessment returns, dividends are added to my 'earned income' to give 'Total income on which tax is due'. I assumed that the "total income on which tax is due" equates to "taxable earnings''. Why would anybody assume anything different?!

Is this just an example of HMRC tax guidance being wrong and/or misleading?
Or perhaps (as some of you seem to be saying) it's an example of why people like me shouldn't try and understand this stuff, and just pay somebody who knows the actual taxation rules?

Dividends are not earnings for pension contribution purposes.

There is more information here,

https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm044100#earnings

Phantom_Investor

Dazed_and_C0nfused said:

Dividends are not earnings for pension contribution purposes.

There is more information here,

https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm044100#earnings

Many thanks - that's very useful!
It seems to me that HMRC (in trying to provide guidance in plain language) are in some cases just confusing people. 

Can I please a another question, regarding HMRC calculations (provided as part of the Self-Assessment)?:

Basic-rate tax on dividends is only 8.75%, but dividends are just added to "Total from all Employments" to give "Total income received". The Personal Allowance is then subtracted to give "Total income on which tax is due". 

This seems to suggest that the dividends are actually taxed at 20%, and not 8.75%

I can't see any further reference to dividends in the calcs.