Personal allowance allocation
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TheCyclingProgrammer
Posts: 3,702 Forumite
in Cutting tax
I learned today that when you have multiple types of income, even though they are always allocated to the income tax bands in a certain order, the personal allowance can be allocated however you want to produce the best result for the tax payer.
As somebody who receives a small salary and dividend income from their own business, this has the potential to reduce my tax liability. It doesn’t affect me for 16/17 as I don’t have any higher rate income but for 17/18 I’m anticipating £8k salary and £54k in dividends.
It’s still at least 3 months until I need to do my tax return but I thought I’d already calculated my tax liability on the basis that my salary and the first £3.5k of dividends would be covered by the personal allowance, the next £5k of dividends by the nil rate band and the remainder split between the basic and higher rate bands.
Now if I understand this correctly I can instead allocate all of my personal allowance to my dividends meaning I pay 20% basic rate tax on the salary but also reduce the amount of higher rate dividends at 32.5% by £8k thus saving me the 12.5% difference which could mean about a grand less in tax.
Have I got this right and if so, more importantly, will the HMRC tax return software also do it this way? I understood they’ve made changes so the personal allowance is supposed to be applied in the most beneficial way but that there had been some teething troubles?
Thanks.
As somebody who receives a small salary and dividend income from their own business, this has the potential to reduce my tax liability. It doesn’t affect me for 16/17 as I don’t have any higher rate income but for 17/18 I’m anticipating £8k salary and £54k in dividends.
It’s still at least 3 months until I need to do my tax return but I thought I’d already calculated my tax liability on the basis that my salary and the first £3.5k of dividends would be covered by the personal allowance, the next £5k of dividends by the nil rate band and the remainder split between the basic and higher rate bands.
Now if I understand this correctly I can instead allocate all of my personal allowance to my dividends meaning I pay 20% basic rate tax on the salary but also reduce the amount of higher rate dividends at 32.5% by £8k thus saving me the 12.5% difference which could mean about a grand less in tax.
Have I got this right and if so, more importantly, will the HMRC tax return software also do it this way? I understood they’ve made changes so the personal allowance is supposed to be applied in the most beneficial way but that there had been some teething troubles?
Thanks.
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Comments
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TheCyclingProgrammer wrote: »I learned today that when you have multiple types of income, even though they are always allocated to the income tax bands in a certain order, the personal allowance can be allocated however you want to produce the best result for the tax payer.
As somebody who receives a small salary and dividend income from their own business, this has the potential to reduce my tax liability. It doesn’t affect me for 16/17 as I don’t have any higher rate income but for 17/18 I’m anticipating £8k salary and £54k in dividends.
It’s still at least 3 months until I need to do my tax return but I thought I’d already calculated my tax liability on the basis that my salary and the first £3.5k of dividends would be covered by the personal allowance, the next £5k of dividends by the nil rate band and the remainder split between the basic and higher rate bands.
Now if I understand this correctly I can instead allocate all of my personal allowance to my dividends meaning I pay 20% basic rate tax on the salary but also reduce the amount of higher rate dividends at 32.5% by £8k thus saving me the 12.5% difference which could mean about a grand less in tax.
Have I got this right and if so, more importantly, will the HMRC tax return software also do it this way? I understood they’ve made changes so the personal allowance is supposed to be applied in the most beneficial way but that there had been some teething troubles?
Thanks.
Could the system be any more complicated?
The following would seem to back you up.
https://www.accountingweb.co.uk/any-answers/sa100-allocating-personal-allowances-allowed
As to HMRC software? :rotfl::rotfl::rotfl::rotfl:0 -
[quote=[Deleted User];73688248]Could the system be any more complicated?
The following would seem to back you up.
https://www.accountingweb.co.uk/any-answers/sa100-allocating-personal-allowances-allowed
As to HMRC software? :rotfl::rotfl::rotfl::rotfl:[/QUOTE]
Tax doesn’t have to be taxing!
I have already seen some reports that HMRC’s software IS applying the personal allowance in the most efficient way (in fact I think I read somewhere that software MUST do this) but wondered if anyone here had any recent experience of this.
If not, we’ll I guess I will find out in April.0 -
[FONT=Verdana, sans-serif]I am probably missing something, but however you cut it don't you end up with £62k income, £17k of which will be taxed at the higher rate and does it not make sense to allocate your £11,500 to the income on which you would pay the higher basic rate ie 20% rather than 7.5%[/FONT]0
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TheCyclingProgrammer wrote: »Tax doesn’t have to be taxing!
I have already seen some reports that HMRC’s software IS applying the personal allowance in the most efficient way (in fact I think I read somewhere that software MUST do this) but wondered if anyone here had any recent experience of this.
If not, we’ll I guess I will find out in April.
HMRC's software didn't do it properly at first - but it was updated, I think in October, for the 16/17 tax year, and is now right for "most" popular scenarios, although there are still mistakes.
Funny thing was that HMRC didn't even realise their software was wrong at first. The software mirrored HMRC's own understanding of the rules, and it was HMRC who completely forget about the ability to allocate the PA as you wish. It took a couple of tax specialists to persuade them they were wrong and then took many months to persuade them to update their software!
The thing is that it never used to matter how you allocated the PA, but now with the £5k dividend zero rate band, the £1k/£500/£nil interest zero rate band, the new savings allowance, and the 7.5%/32.5% dividend tax bands, it has suddenly become an issue again. At a time when the Treasury was allegedly trying to simplify tax, they've come up with some gimmicks which have made it more complicated than ever.
Apparently, there's another foul-up that HMRC have yet to acknowledge which luckily affects relatively few people. It's "top slicing relief" and is impacted by these new zero rate bands, savings allowance etc. By the same token, there is a part of calculation which HMRC have ignored for years because it made no difference, but now these changes mean there is a difference, yet HMRC calculations and software are still ignoring this calculation step, which means lots of wrong calculations! Probably have to wait until next October for that to be corrected in their software.0 -
[FONT=Verdana, sans-serif]I am probably missing something, but however you cut it don't you end up with £62k income, £17k of which will be taxed at the higher rate and does it not make sense to allocate your £11,500 to the income on which you would pay the higher basic rate ie 20% rather than 7.5%[/FONT]
Hmm, going back over my calculations it does seem that allocating all of the personal allowance in my example isn’t beneficial.
However the example I first worked out was beneficial to the tune of £600 or so and the numbers were similar. In that case I was using the 16/17 tax bands and allowances, £8060 salary and £50k of dividends.
I can’t quite figure out why it works with those numbers but not the ones on my first post. I must be missing something obvious.0 -
Ok, I figured out where I was going wrong in my original example. Move along nothing to see here!
(It is worth pointing out that there ARE scenarios where it can be beneficial to allocate more personal allowance to dividends than earned income but not in this case).0
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