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  • FIRST POST
    • silvercar
    • By silvercar 13th Jan 19, 11:31 AM
    • 38,472Posts
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    silvercar
    AMENDED: self assessment error: basic rate div tax not for mortgage interest?
    • #1
    • 13th Jan 19, 11:31 AM
    AMENDED: self assessment error: basic rate div tax not for mortgage interest? 13th Jan 19 at 11:31 AM
    Should the restriction to basic rate tax for 25% of the mortgage interest on letting expenses be applied to the dividend income as it is to the earnings tax rate? I would have thought so, in which case I think I may have discovered an error on the self assessment online calculation.

    Example:
    1. PAYE - £5k
    2. letting income £5k (gross £10k, expenses £3k, mortgage interest £2k)
    3. Dividends £10k.

    Under the new rules for 2017-18, 25% of the mortgage interest goes in that "other" box 3 pages after the letting expenses, so it is restricted to the basic rate.

    So my final calculation page has:

    PAYE 5k
    letting income 5.5k
    dividend income 10k
    ---
    other income restrict to basic rate £500

    the tax calculation has

    PAYE 5k
    letting income 5.5k
    total 10.5k

    10.5k taxed at 0% = 0


    dividend income 10k
    6k taxed at 0% =0
    4k taxed at 7.5% = £300

    -£500 restricted to 20 % basic rate = 0.

    It is this last line that I am querying, I thought that the restriction to basic rate would be applied to all income, so in this case the dividend income that is taxed at basic rate for dividends should lead to a reduction in the dividend tax at 7.5%.
    Last edited by silvercar; 13-01-2019 at 1:00 PM.
Page 1
    • Dazed and confused
    • By Dazed and confused 13th Jan 19, 12:02 PM
    • 3,536 Posts
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    Dazed and confused
    • #2
    • 13th Jan 19, 12:02 PM
    • #2
    • 13th Jan 19, 12:02 PM
    You refer to 2017:18 but appear to be getting Personal Allowance of £11,000 not £11,500.

    Why is that?

    What is the actual total amount payable for 2017:18 i.e. the final figure after all adjustments etc.

    Don't include any POA for 2018:19, just the total due for 2017:18
    • Pennywise
    • By Pennywise 13th Jan 19, 12:04 PM
    • 11,080 Posts
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    Pennywise
    • #3
    • 13th Jan 19, 12:04 PM
    • #3
    • 13th Jan 19, 12:04 PM
    I've just put the data into our software and the tax liability comes out at £1,175 being:-

    Employment £10k
    Property £5.5k
    Dividends £10k Total £25.5k
    Less PA £11.5k
    Taxable £14k
    £4k at 20% = £800
    £5k divs at nil - £nil
    £5k divs at 7.5% = £375
    Total tax £1175
    Less BR int relief £500 @ 20% £100
    Tax due £1075

    Are you sure you've put your interest in the right boxes. I fear you may be putting the £500 in the wrong box. It should be:-

    Box 26 £1500
    Box 44 £500

    Box 44 is "residential finance costs not included in box 26"
    Last edited by Pennywise; 13-01-2019 at 12:42 PM.
    • polymaff
    • By polymaff 13th Jan 19, 12:04 PM
    • 2,386 Posts
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    polymaff
    • #4
    • 13th Jan 19, 12:04 PM
    • #4
    • 13th Jan 19, 12:04 PM
    No - it is a measure solely designed to restrict the amount of Income Tax relief landlords can get on residential property finance costs. It certainly won't reduce your overall tax liability - as you seem to hope.

    As you appear to pay no more than basic rate, it doesn't affect your tax liability - hence the final "0" you query.
    • Dazed and confused
    • By Dazed and confused 13th Jan 19, 12:16 PM
    • 3,536 Posts
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    Dazed and confused
    • #5
    • 13th Jan 19, 12:16 PM
    • #5
    • 13th Jan 19, 12:16 PM
    Doesnt £800 + £375 = £1,175???
    • Dazed and confused
    • By Dazed and confused 13th Jan 19, 12:18 PM
    • 3,536 Posts
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    Dazed and confused
    • #6
    • 13th Jan 19, 12:18 PM
    • #6
    • 13th Jan 19, 12:18 PM
    Polymaff, I clearly need to read up on this, I mistakenly thought the op would get £100 relief in this situation (where more than £100 tax is charged on the rental income).
    • silvercar
    • By silvercar 13th Jan 19, 12:34 PM
    • 38,472 Posts
    • 161,298 Thanks
    silvercar
    • #7
    • 13th Jan 19, 12:34 PM
    • #7
    • 13th Jan 19, 12:34 PM
    You refer to 2017:18 but appear to be getting Personal Allowance of £11,000 not £11,500.

    Why is that?

    What is the actual total amount payable for 2017:18 i.e. the final figure after all adjustments etc.

    Don't include any POA for 2018:19, just the total due for 2017:18
    Originally posted by Dazed and confused
    My error, I will amend.

    I was using rounded figures to make life easier, rather than those from my tax return, which includes other irrelevant stuff.
    • polymaff
    • By polymaff 13th Jan 19, 12:41 PM
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    polymaff
    • #8
    • 13th Jan 19, 12:41 PM
    • #8
    • 13th Jan 19, 12:41 PM
    AIUI the change this measure introduces over the next four years is that Landlords' finance charges will be steadily and increasingly extracted from the profit calculation and will instead be relieved explicitly.

    This means that Landlords will not be able to relieve themselves at their highest tax rate but will receive a direct tax rebate on the lesser of either the interest extracted or their amount of non-savings taxable income taxed at basic rate - at basic rate.
    Last edited by polymaff; 13-01-2019 at 12:44 PM.
    • silvercar
    • By silvercar 13th Jan 19, 1:05 PM
    • 38,472 Posts
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    silvercar
    • #9
    • 13th Jan 19, 1:05 PM
    • #9
    • 13th Jan 19, 1:05 PM
    AIUI the change this measure introduces over the next four years is that Landlords' finance charges will be steadily and increasingly extracted from the profit calculation and will instead be relieved explicitly.

    This means that Landlords will not be able to relieve themselves at their highest tax rate but will receive a direct tax rebate on the lesser of either the interest extracted or their amount of non-savings taxable income taxed at basic rate - at basic rate.
    Originally posted by polymaff
    That was my understanding too, but I thought that dividend income would be relieved at basic rate for basic rate tax payers.

    So I have paid tax on dividends and am a basic rate taxpayer and the mortgage interest is an allowable expense restricted to basic rate, but I can't get it back!
    • Dazed and confused
    • By Dazed and confused 13th Jan 19, 1:07 PM
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    Dazed and confused
    But your example has now been completely changed so you have no tax liability on the rental income.

    So I doubt you can get relief in the tax year concerned for the 25% which cannot be claimed as an expense.

    Not sure but you may be able to carry this forward against tax payable on future years rental profits.
    • silvercar
    • By silvercar 13th Jan 19, 1:10 PM
    • 38,472 Posts
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    silvercar
    But your example has now been completely changed so you have no tax liability on the rental income.
    Except I did because I have had some expense (the 25% of the mortgage interest) which hasn't been allowed to be deducted from the rental income. If it had been deducted I would have had more unused personal tax allowance that I could put against the dividend and then pay less tax on the dividend. To deliver that result the box 44 figure should have had 7.5% tax allowed against it.
    • Dazed and confused
    • By Dazed and confused 13th Jan 19, 1:17 PM
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    Dazed and confused
    Gov.uk would suggest otherwise. The third rule would seem to be your problem.

    https://www.gov.uk/government/publications/restricting-finance-cost-relief-for-individual-landlords/restricting-finance-cost-relief-for-individual-landlords

    Individuals will be able to claim a basic rate tax reduction from their Income Tax liability on the portion of finance costs not deducted in calculating the profit. In practice this tax reduction will be calculated as 20% of the lower of the:

    finance costs not deducted from income in the tax year (25% for 2017 to 2018, 50% for 2018 to 2019, 75% for 2019 to 2020 and 100% thereafter)

    profits of the property business in the tax year

    total income (excluding savings income and dividend income) that exceeds the personal allowance and blind personís allowance in the tax year

    Any excess finance costs may be carried forward to following years if the tax reduction has been limited to 20% of the profits of the property business in the tax year.
    • silvercar
    • By silvercar 13th Jan 19, 1:50 PM
    • 38,472 Posts
    • 161,298 Thanks
    silvercar
    Any excess finance costs may be carried forward to following years if the tax reduction has been limited to 20% of the profits of the property business in the tax year.
    Does this mean I should carry it forward to next year? I'm not sure as my excess finance costs have been limited to 0.
    • polymaff
    • By polymaff 13th Jan 19, 1:52 PM
    • 2,386 Posts
    • 1,066 Thanks
    polymaff
    AIUI the change this measure introduces over the next four years is that Landlords' finance charges will be steadily and increasingly extracted from the profit calculation and will instead be relieved explicitly.

    This means that Landlords will not be able to relieve themselves at their highest tax rate but will receive a direct tax rebate on the lesser of either the interest extracted or their amount of non-savings taxable income taxed at basic rate - at basic rate.
    Originally posted by polymaff
    That was my understanding too, but I thought that dividend income would be relieved at basic rate for basic rate tax payers.

    So I have paid tax on dividends and am a basic rate taxpayer and the mortgage interest is an allowable expense restricted to basic rate, but I can't get it back!
    Originally posted by silvercar

    Well, that [the post of mine you quote] WASN'T your understanding - as it is clear from that post that the only type of income addressed by this process is non-savings taxable income.
    • silvercar
    • By silvercar 13th Jan 19, 2:04 PM
    • 38,472 Posts
    • 161,298 Thanks
    silvercar
    Well, that [the post of mine you quote] WASN'T your understanding - as it is clear from that post that the only type of income addressed by this process is non-savings taxable income.
    Originally posted by polymaff
    The first paragraph was my understanding!
    • polymaff
    • By polymaff 13th Jan 19, 2:28 PM
    • 2,386 Posts
    • 1,066 Thanks
    polymaff
    The first paragraph was my understanding!
    Originally posted by silvercar
    Hence my smiley face.

    When I reply to forums I try to do two things: Directly address the questions asked, one by one, and, faced with a hungry questioner, I try to teach them how to fish rather than just chuck a fish at them.

    Hopefully, that is the better value approach - but it also gets around having to rely on too much of the poster's stated facts and assumptions - like your dodgy £11k.


    My version of "If I wanted to get there, I wouldn't start from here", I guess.
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