SA questions relating to rental income and dividends

Danstable

I'm in need of some guidance, I hope someone can help.

My situation:

- Lived in my own house with a repayment mortgage and a tennant until late May '06, rental income was just £570 for that bit of the tax year.
- Until late May '06 I was employed on PAYE and took home £2,460 not sure of the amount of tax paid.
- From late May '06 till the end of the tax year I moved into rented accomodation and let out another room in my house, total rental income for that period was £7,070.
- From late May '06 I earned £14,600 in dividends and £1,200 in salary with no tax paid.

So, the totals are as follows:

Rental income £7,640
Dividends £14,600
Net income after tax paid £2,460
As yet untaxed income £1,200

Questions:

1 - Can I still claim rent a room allowance after I have left the property?
2 - Can rental income over the rent a room allowance be classed as 'salary' and therefore no tax payable upto my £5,035 personal allowance?
3 - I was under the impression that dividends paid for work undertaken were not personally taxable as the tax is paid on the company's side, is this the case?

All help and advice much appreciated, if further detail is required please just ask.

Thanks,

Dan

Elaine_Wilson

I see no one has answered this yet so I'll make a start.

First the Rent-a-room relief. This is a bit tricky and I'm not sure of the exact answer. I'll explain further. With this relief there is the concept of a "basis period", which is usually the same as the tax year. Now when you moved out I assume you obtained a second tenant?

OK. Now if you had stuck with the first tenant only or had let him have more accommodation after you had moved out then the relief would apply for the whole year. So as far as that tenant is concerned the answer to your first question is yes.

My uncertainty comes about as the Revenue manuals refer to the relief having to apply to the whole of the income from the property. To see the problem let's consider the second tenant in isolation.

If you did not have the first tenant then you would have moved out before the letting began. So that income would not be eligible for the relief. So the income from the second tenant would not gain the relief.

Putting the two together can the relief be claimed. I would think so but am willing to be corrected by someone with more knowledge.

Question 2. You don't need to classify any chargeable excess rent as salary; it just forms part of your total income. Unused personal allowance can be set against this income.

3. Dividends are treated as being received net of 10% tax. No further tax is due unless your total income puts you into higher rates.

I therefore make your tax position (on the basis of what I've said above) something like this.

Total income £23,950. This is salary £3,138 (guessed) + salary £1,200 + excess rents £3,390 + gross dividend £16,222.

After deducting the personal allowance of £5,035 the taxable income is £18,915.

The tax due on this is 16,222 @ 10% (£1,622) and 2,693 @ 22% (£592), a total of £2,214.

You have already paid £429 on the first salary and have a credit of £1,622 on the dividend - a total of £2,051, so there is a balance of £163 to find.

I've just realised there is a small mistake in my calculation of the first salary so these figures are out but you will need to check your P45 for the actual figures anyway.

Not a complete answer but I hope it helps.

Danstable

A great start Elaine, many thanks for taking the time to reply. Hopefully someone else will come along and confirm your advice or perhaps add to it.

Danstable

Does anyone have anything to add?

Danstable

Elaine....got a couple of further questions for you....or anyone else who cares to lend a hand!

Having got all the correct figures to hand the numbers are as follows:

Total Salary = £4,031.25
Tax paid on salary = £395.01
Total Rent = £7,640
Taxable Rent = £3,390
Total Dividends = £16,222.22
Tax paid on dividends = £1,622
Taxable Income from Salary & Rent = £2,386.25

Now, looking at the rates table below it confirms that the Dividends are done and dusted with the 10% tax already paid (As I'm not a higher rate tax payer).

This leaves me with the Taxable Income of £2,386.25 (Total Salary + Taxable Rent - Personal Tax Allowance). The table below suggests I pay 10% on the first £2,150 and 22% on the remaining £236.25 giving a total tax liability of £266.98. As I have already paid £395.01 I am due a rebate....IF I HAVE MY CALCULATIONS CORRECT!

Have I misunderstood the tax bands or done something stupid with the numbers?!

Thanks in advance,

Dan



Rates 06-07
10% on first £2,150
22% (20% for savings income) on next £31,150
40% on income over £33,300

Dividends for:
basic rate taxpayers 10%
higher rate taxpayers 32.5%

CLAPTON

I am curious about the dividend
do you own the company, part owner or what exactly?

Danstable

I own one share to enable payment in the form of a dividend. It works out better than salary from a tax viewpoint.

That's as much as I know.

Elaine_Wilson

Danstable, I think your calculations are spot on.

Danstable

Thanks Elaine, let's see if the tax man agrees!

Danstable

Just for people's information incase they are in a similar situation...

...I am now looking at forgetting rent a room and switching to the 10% wear and tear allowance, it seems it will save me £250 or so in tax and show a loss that I can carry forward to next year.

CLAPTON

my understanding is that rent a room only applies
if the rent is 4250 or less
and
a. if greater you can't 'offset' ..the full amount has got to be treated at proper taxable rent
b. you actually live there

and also if you don't live there, then when you sell you may be liable to CGT.